General Principles of Audit: (Auditi ng Theory by Salosagcol, p.

11)

1. The auditor should comply with relevant ethical requirements relating to audit engagement.
2. The auditor should conduct an audit in accordance with Philippine Standards on Auditing
(PSAs).
3. The auditor should plan and perform the audit with an attitude of professional skepticism
recognizing that circumstances may exist that cause the financial statements to be materially
misstated.
4. The auditor should plan and perform the audit to reduce audit risk to an acceptably low level
that is consistent with the objective of an audit.

 Professional Skepticism
 The auditor is critical, recognizing that there may be circumstances that will cause the financial
statements of the client to be materially misstated. Therefore, the auditor has to be doubtful
and he needs to validate whether those assertions or representations of the management are
true and correct.
 The auditor has the responsibility to find evidence that may corroborate or contradict the claim
of the management.

 The management prepares the financial statements. The auditor's responsibility is just to find out if
the financial statements conform to the acceptable financial reporting framework.

 Sham Audit - auditors don't perform the process of audit and just follows what the management
says.

 Fundamental Ethical Principles: (Auditing Theory, p.41)

1. Integrity - honest and straightforward
2. Objectivity - not bias
3. Confidentiality - respect the confidentiality of all the information you've obtained in the course
of your audit.
4. Professional Competence and Due Care - you shall render professional competence service
(CPAs undergo trainings, seminars, etc.)
5. Professional Behavior - we present ourselves in proper way

 The moment the auditor submits his audited report to the board of the directors of his client, his
relationship with his client ends.
 You must still maintain the confidentiality of the report even if relationship ends.
 RA No. 9298
 Philippine Accountancy Act of 2004
 Includes Code of Ethics for CPAs

 Audit Procedures:
1. Risk assessment procedure - for purposes of getting the level of risk (ex: inquire, observe,
inspect)
2. Test of Control - study the internal control system
3. Substantive Test Procedures - gathering pieces of evidence (ex: confirmation letters to banks,
to suppliers, conducting ocular inspection)

 Substantive Test Procedure - indispensable. It must always be performed regardless of level of risk.
 Test of Control - dispensable. Its purpose is to ascertain whether the initial assessment of low
control risk is valid or not.
 Under what circumstance can the test of control not be performed by the auditor (or dispensable)?
When the assessment of level of risk is high. Because in audit there is economic constraints.
 When is the test of control performed? If control risk is low. The auditor will perform test of control
procedures by performing a more in-depth study of the client's internal control system.

 The higher the risk, the more evidences the auditor must gather to have strong conviction in
forming his opinion.
 After performing the audit procedures, then the auditor will form his opinion.
 PSA - serves as the guidance on how the auditor will conduct the audit.

 Auditor must prepare audit program in each account of financial statement.

 Separate program for cash, for receivables, for inventories, etc.
 Ex: Perform bank reconciliation, proof of cash, conduct cash count [all are substantive test
procedures]

 There must be proper planning in auditing.

 Audit planning - the main output of audit planning.
 There should be a supervisor in each engagement team.
 Detection Risk
 The risk that the auditor will not be able to detect material misstatement because of
inappropriate audit procedure performed.
 Ex: Management claimed that the land is located in Laguna, the auditor will conduct ocular
inspection by going to Laguna to check if the land exists. Even if the land exists there is a
chance that the land is sold to another party. Therefore, the auditor must ask for proof of
ownership as evidence.

 CHAPTER 1: FUNDAMENTALS OF ASSURANCE SERVICES

 Why the need for an audit? The level of credibility or reliability of information is enhanced when
the auditor affixes his signature.
 Audited FS - there is already a signature of the auditor attesting the reliability of the information
presented.

 Assurance Services
 applies to all engagement performed by other professionals.
 audit of financial statements is an example.
 assurers report on the quality of information.
 The auditors assure the intended users that the information presented in the client's FS is in
accordance with the acceptable financial reporting framework and are fairly presented.

 Elements of Assurance Engagements: (All must be present to be considered as assurance

engagement)
1. Three party relationship
2. Appropriate subject matter
3. Suitable Criteria
4. Sufficient appropriate evidence
5. Written assurance report

 Three Parties in Assurance Services:

1. The Practitioner - CPA
2. The Responsible Party - the management or the person who engaged the services of the
practitioner
 3. Intended Users - client, government, shareholders

 Subject Matter:
 Examples:
1. In a financial statement audit, the appropriate subject matter is the assertion of the
management that that is their actual financial position as of December 31 as embodied in
the financial statement position.
2. They claim that is their actual performance during the period as embodied in the statement
of comprehensive income.
3. They claim that it is their actual cash flows.
 The appropriate subject matter is not the balance sheet itself. It’s the content. It’s the claim of
the management that it is their actual financial position, financial performance, or their actual
cash flows as manifested in their financial statements comprising the balance sheet, income
statement, the cash flow, the changes in equity and notes to financial statement.

 Criteria:
 standard that the auditor needs to use in determining whether the subject matter (FS) is in
accordance with the suitable criteria.
 There must be a basis of comparison.
 in the audit of financial statements, the criteria is the Philippine Financial Reporting Standards
(PFRS).

 If the client company is large such as banks, pawnshop and insurance company, the criteria is Full
PFRS. Do not use the PFRS for SME (Small Medium Entities).
 Company is small if total assets is between P3M to P100M. (PFRS for Small Entities)
 Company is medium if total assets is more than P100M to P350M. (PFRS for SME)
 Company is large if assets or total liabilities is more than P350M. (PFRS for Large Entities)

 At what amount should inventory be presented at balance sheet date: @ lower of cost and net
realizable value. (If it is a small entity it is @ fair value)

 Sufficient Appropriate Evidence:

 Attribute: Sufficient
 amount or quantity of evidence the auditor needs to support his decision.
 DOES NOT imply that there must be a complete examination of all transactions or
documents entered by the client during the period which is subject of the audit. It is
 because the standard only says the evidence should be sufficient enough, based on the
auditor's professional judgement, to render an opinion.
 there are factors that need to be considered in determining the sufficiency of audit
evidence such as risk and materiality.
 the higher the risk, the more audit evidence the auditor needs. (Level of risk and
materiality is directly proportionate to amount of evidence needed)
 Attribute: Appropriate
 quality of evidence
 relevant to the assertions claimed by the management and is reliable (truthfulness of
evidence, free from bias and error).
 relevant means the evidence is responsive to the claim of the management that it is
existing, it is properly valued, and their FS is properly presented.
 Ex: Proof of ownership (from the example in detection risk).

 Audit sampling:
 most common method used in a risk-based audit.
 the auditor will just make an estimate, based on his professional judgement, on what would be
the appropriate amount or percentage of the samples to be tested.
 Examples:
1. In the course of your audit, you obtained inconsistent evidence (the claims of management
are different from the claims of external parties). You must rely from the outside of the
company [Audit & Assurance Principle, p. 11]
2. You performed bank reconciliation and the results differ from the management's ledger.
You must rely on your bank reconciliation result.

 Written assurance report

 report prepared by the practitioner.
 If audit of FS, it is the audit report.

 Non-Assurance Engagement:
 If one or more elements of assurance engagement is lacking it is a non-assurance engagement.
 Ex:
1. You are consulted by the client regarding the assessment from the BIR (Tax Consultancy - you
just give a piece of advice, there's no written assurance report).
2. You are asked by the client to assist them in the preparation of income tax return (There's no
written assurance report)
 Other example of assurance engagement:
1. Review engagement
2. Compliance audit - you are engaged to determine if the client is complying with relevant laws
and regulations.

 Assurance Engagement Concepts in Obtaining Evidence:

1. Professional Skepticism
2. Sufficiency and Appropriateness of Evidence
3. Cost-benefit consideration
4. Materiality
5. Assurance Engagement Risk

 Cost-benefit consideration:
 You consider this when obtaining evidence.
 In financial statement audit, there are economic constraints (time and money)
 Ex: When obtaining evidence, choose an alternative audit procedure that is cheaper.
 If there is no alternative, the rule is that no matter how much it costs or difficult but the
information is very critical or material, the auditor has no recourse but to perform that
procedure. [Audit & Assurance Principle, p.12]

 Materiality:
 common concept all throughout the audit.
 When is an item considered material? When it will affect the decision of the users of financial
information and the fairness of presentation.
 If the evidence is very material or very critical, he needs to dig in pieces of evidence in support
of his opinion.
 Audit risk and materiality are inversely proportionate. [Salosagcol, p.176]
 Materiality is relevant when the practitioner determines the nature, timing, and extent of
evidence-gathering procedure and when assessing whether the subject matter information is
free of misstatement.

 Assurance Engagement Risk:

 In FS Audit: it is called audit risk.
 The risk that the practitioner expresses an inappropriate conclusion or opinion when the
subject matter information is materially misstated.
 Proper audit planning minimizes assurance engagement risk.
 What is the standard attribute of an audit evidence in a financial statement audit? It has to be
sufficient and appropriate.
 What is the quality of an audit evidence? It has to be relevant and reliable.
 Generalizations about the reliability of evidence: (Evidence is more reliable when...)
1. It is obtained from independent sources outside the entity.
2. Evidence that is generated internally is more reliable when the related controls are effective.
3. Obtained directly by the practitioner
4. It exists in documentary form
5. Provided by original documents

 When obtaining information outside, you need to consider their independence.

 Evidence obtained through observation is more reliable than inquiry.

 Classification of Assurance Engagement:

1. According to Level of Assurance

a. Reasonable Assurance Engagement

b. Limited Assurance Engagement

2. According to Structure

a. Attestation Engagement

b. Direct Engagement

 Reasonable Assurance
 Ex: Financial Statement Audit

 Highest level of assurance that an auditor may render in financial statement audit: Reasonable
assurance
 There's no guarantee (absolute assurance) that the client's financial statement is misstated
because of the limitations of audit.

 Limited Assurance
 Procedures performed is less than reasonable assurance.
 Level of risk is higher than reasonable assurance.
 Ex: Review engagement (inquiry, observation, reconciliation, vouching can be done)
 Attestation Engagement
 Ex: Financial Statement Audit
 The responsible party (management) will measure and prepare the financial statement and the
auditor's responsibility is whether the claims by the management is true by digging pieces of
evidence.

 Direct Engagement
 The practitioner measures the information related to the assurance engagement and makes
the report.

 Limitations of Assurance Engagement:

1. Use of selective testing

 A limitation because there is sampling risk. The results of the chosen samples is assumed to be
the same with the rest of the population.
 Sampling risk - the risk that the results of the sample tested may not be representative to the
entire population.
 To reduce sampling risk, the auditor must increase sample size.

2. Inherent limitations of internal control

 Ex: Despite how well designed and properly implemented the client's internal control system
may be, when there is collusion or connivance among the employees or management or from
people outside the entity, the auditor may find difficulty in determining the risk regularity or
misstatements of information as reflected in the client's financial statement.
 Ex: Management uses their overriding authority (Entity is granting line of credit to a client and
their policy is up to P500,000. But one client is a close friend to the president, the policy can be
overridden by the top management for that client.)

3. Evidence is persuasive rather than conclusive

 There is room for doubt.

4. Use of judgement in gathering and evaluating evidence and forming conclusions based on that
evidence

5. Characteristics of the subject matter

 Ex: There may be information reflected in the financial statements not properly stated because
the subject matter is voluminous. Or some transactions are foreign.
 CHAPTER 2: AUDITS OF FINANCIAL STATEMENTS INTRODUCTION

 Assertions - claims or representations or manifestations of the management as embodied in the

financial statements.
 The appropriate subject matter the management is trying to ascertain is their financial
performance.

 Assertions of Management: (E-CR-VP)

1. Assertion of Existence or Occurrence

 Existence applies to real account (balance sheet account)

 Occurrence applies to nominal account (income statement account)

2. Assertion of Completeness

 Asserting that all transactions are properly reflected in the financial statements during the
period.

3. Assertion of Rights and Obligation

 rights refer to ownership while obligation refer to liabilities

4. Assertion of Valuation

 presented at proper amount.

 management claims all those accounts and balances reported on their financial statement is
true and correct

5. Assertion of Presentation and Disclosure

 Types of Audit Opinion:

1. Unqualified opinion - auditor has no qualification but the FS is still fairly presented
2. Qualified opinion - the FS is fairly presented; there is slight qualification but it does not affect
the fairness of the presentation
3. Adverse opinion - evidence says that it is not fairly presented (Ex: the company can no longer
operate as a going concern [the entity can't continue their operation in the foreseeable future]
and it wasn't disclosed in the notes to FS)
4. Disclaimer of opinion - auditor can't render opinion

 Under what circumstance will disclaimer of opinion will be rendered? When in the auditor's
judgement, an item is considered so material that it is affecting the fairness of presentation of the
 FS so that he was not able to gather sufficient appropriate evidence because of restrictions
imposed by the management.

 Types of Audit:
1. Financial Statement Audit
2. Operational Audit
3. Compliance Audit
4. External Audit
5. Internal Audit
6. Government Audit

 Internal auditor is still an employee of the audit client. His function is to ascertain whether there's
compliance with the policies and procedures imposed by the management.
 Internal auditor directly reports to: the audit committee or the audit committee of board of
directors. He rarely communicates with the management to maintain independence.
 Internal auditors talk to the management about administrative matters (ex: budget assigned).
 Auditor in Government Audit: Commission on Audit
 Objective of Financial Statement Audit: For the auditor to express an opinion whether the financial
statements are prepared in all material respects in accordance with the acceptable financial
reporting framework.
 In issuing an unqualified opinion, the auditor guarantees there's no material misstatement, but
there are still misstatements but not material.
 The user of financial statement cannot assume the opinion of the auditor is an assurance as to the
future viability of the entity nor the efficiency and effectiveness in which the management
conducted the affairs of the entity.

 The preparation and presentation of financial statement in accordance with suitable criteria is the
responsibility of the management even if it is being audited.

 Approaches to auditing financial statement:

1. Risk-based audit - commonly used; the auditor makes an initial assessment of level of risk

2. Top down approach - starts with identification of strategic issues affecting the audit and uses them
to determine the overall strategy for the audit.

3. Balance sheet approach - auditor audits the assets and liabilities of the entity, with little emphasis on
profit and loss account items.
4. Transaction approach - audits more on nominal accounts than real (balance sheet) account.

5. System approach - the auditor plans significant reliance on control.

6. Verification or substantive approach - gathering of evidence

7. Financial risk approach - auditor considers financial risk and materiality in planning the audit work.
 CHAPTER 3: THE PROFESSIONAL PRACTICE OF ACCOUNTING

 Attributes to become a CPA (STD by Sir Burgos):

1. Sipag (Hardworking)
2. Tiyaga (Persevering)
3. Determinasyon (Determined)

 CPA is now recognized to have equal footing with other professions like law and medicine because
it is possessing the attributes as required for a profession.

 Attributes that make accountancy a profession:

1. Mastery of a particular intellectual skill, acquiring by training and education
2. Adherence by its members to a common code of values and conduct established by its
administrating body, including maintaining an outlook which is essentially objective
3. Acceptance of duty to society as a whole (usually in return for restrictions in use of a title or in
the granting of a qualification).

 To become a CPA, you need to finish Bachelor of Science in Accountancy and pass the CPA
Licensure Exam.

 Sectors of Accounting:
1. Public practice
 you may be engaged in rendering assurance engagement
 you may build your own accounting office
2. Private practice
 in the private sector.
 employed in one big corporation like San Miguel Corporation.
 you can be the president, vice president for finance, controller, or an accountant.
 If employer has capital of P5M above or annual revenue of at least P10M. It is a
requirement that the one supervising the recording of financial transactions,
preparation of financial statements, or even coordinating with external auditors, must
be a CPA.
3. Practice in Education or Academe
 as an instructor, professor, dean or chair in the college of accountancy.
4. Practice in Government
 employed in the government.
 Financial Statement Audit - main service offered by CPAs that only CPAs can render because of the
knowledge CPAs possess.

 Where CPAs practicing in the government sector are usually found:

o BIR
o COA
o SEC
o Government Bonds
o LGUs

 Can a CPA practice his profession in more than one sector? Yes, as long as there's no conflict of
interest.
 CPAs can engage in private and public practice at the same time as long as you should not be the
external auditor of your own employer because you will not maintain independence.
 CPAs in the government sector CAN'T engage in public practice because there's conflict of interest.
The fundamental ethical principle of objectivity is compromised. For example, you are assigned as
an examiner of the financial statement you audited. You can engage in other sectors such as
private or academe.

 REGULATION OF THE ACCOUNTING PROFESSION

 All professions need to be regulated, not just CPAs.

 If there are violations, there are sanctions and penalties that may be imposed against them.

 Ethical principles:
1. Integrity
2. Objectivity
3. Confidentiality
4. Professional behavior
5. Professional competence and due care

 Accounting Profession is Regulated by:

1. R.A. 9298 or the Philippine Accountancy Act of 2004 implemented by the Board of Accountancy
(BOA)
Main function or governing function of RA 9298:
i. The standardization and regulation of accounting education
ii. The examination for registration of CPAs
 iii. The supervision, control and regulation of the practice of accountancy in the
Philippines.
 Provisions of RA 9298 are to be carried out by the BOA.

2. Financial reporting standards and Engagement Standards

 Financial reporting standards we need this as our criteria in performing the financial
statement audit
 we need these standards as our guide on how we are going to conduct the
engagement standard.

3. Adoption of a Code of Ethics for CPAs in the Philippines

 This includes Fundamental ethical principles, Conceptual framework, the required rules
you need to follow, the safeguards that CPAs need to apply or measure every time they
encounter circumstances that would compromise their compliance with their
fundamental ethical principles.

4. Self-regulation through a system of quality control

 Entities (for example, entities whose shares of stocks are publicly traded) need to have
quality review committee in their respective organization before this is subject to
another review by another quality review committee created by the BOA to assist
them.

5. Sanctions and penalties against violators of the laws, rules and regulations affecting the
accounting profession.
 For example, you don't have the accreditation as required by the BOA and you keep
engaging in the audit of FS. That is a violation of RA 9298.

 ORGANIZATIONS AFFECTING ACCOUNTING PROFESSION:

1. Professional Regulation Commission (PRC)
 you go to PRC every time you renew your license and accreditations.

2. Professional Regulatory Board of Accountancy (PRBOA)

 created by the PRC to administer and implement RA 9298.
 you need to be accredited by the BOA to practice accountancy.

3. Commission on Audit (COA)

 independent body created in our Constitution to engage in the audit on how the public
funds/sources are utilized and dispersed.

4. Securities and Exchange Commission (SEC)

 You need to be accredited by SEC if you want to engage in public practice.
  For instance, if your client is a large company like a bank, insurance companies or
entities whose shares of stocks are publicly traded, you need to comply on the
requirements of SEC.

5. Banko Sentral ng Pilipinas (BSP)

 If your client is a bank you also need to be accredited by the BSP

6. Bureau of Internal Revenue (BIR)

7. Insurance Commission (IC)

 BOARD OF ACCOUNTANCY (BOA):

 It is the official government agency empowered to enforce RA 9298
 COMPOSITION: 1 chairman and 6 members appointed by the President of the
Philippines.
 The 4 sectors in the practice of accountancy shall as much as possible be equitably
represented in the BOA.

 COUNCILS FORMED TO ASSIST THE BOA:

1. Education Technical Council (ETC)
 assist the BOA in continuously upgrading accounting education in the Philippines.

2. Quality Review Committee (QRC)

 created to conduct an oversight into the quality of audits of financial statements
through a review of the quality control measures instituted by individual CPAs,
firms or partnerships.
 main function is to determine whether the CPAs engaged in public practice
complied on the required rules and regulations before they affix their signature on
the audit report. It is to find out if the audit procedure is performed well.
 that is why entities whose shares of stocks are publicly traded have quality
reviewer before they are subjected to review by quality review committee created
by the BOA.
 For instance, if your client is a publicly traded company you need to be accredited
by SEC. If your client was subjected of quality review by the QRC of BOA and they
found out that the audit was not properly carried out, there are standards not
followed by the client, yet you issued a qualified or unqualified opinion, this could
warrant your non-renewal on of your accreditation. You are not allowed to conduct
FS audits on companies that need SEC accreditations.

3. PRC CPD Council

  created by the BOA to assist us if our concern is compliance of the CPD
requirements.

 If your client is a cooperative, you need to be accredited by the Cooperative Development

Authority.

 Can a member of the BOA be removed or suspended? Yes.

 The PRC is in charge of the hearings.
 The President of the Philippines may suspend or remove of the member.

 Following Grounds:
1. Neglect of duty or incompetence
2. Violation or toleration of any violation of RA 9298 and its IRR or the CPAs Code of Ethics
3. Final judgement of crimes involving moral turpitude
 Supreme Court renders the final decision.
 Examples of moral turpitude: murder, falsification of public documents, or bribery
 If political crime like rebellion or sedition, it is not covered by RA 9298.

4. Manipulation or rigging of the CPA licensure examination

 Examiners are the BOA. Each of them has subjects to prepare.

 STANDARD-SETTING BODIES:
1. Financial Reporting Standards Council (FRSC)
2. Auditing and Assurance Standards Council (AASC)
 body that develop the standards you follow in auditing financial statements.
 those standards developed by an international body - the International Auditing and
Assurance Standards Board (IASB).

3. International Accounting Standards Board (IASB)

 international body that is tasked of developing standards to be followed for financial
reporting purposes.
 local body is the Financial Reporting Standards Council.

4. International Auditing and Assurance Standards Board (IAASB)

 counterpart of AASC.
  ASEAN INTERGRATION:

Objectives of the ASEAN Mutual Recognition Arrangement (MRA) Framework:

1. To facilitate the negotiations of MRAs on Accountancy Services between or among ASEAN
Member States by providing a structure towards the conclusion of such MRAs.
2. To exchange information in order to promote and take into consideration the development of
the best practices on standards and qualifications in the accountancy profession.

 MRA:
 is the product of a meeting among the ASEAN countries.
 main objective is to allow cross border movement of professional accountants, providing external
auditing services and other accountancy related services that requires domestic licensing in ASEAN
member states and may continue to be facilitated through bilateral or multilateral MRAs between
or among ASEAN member countries.
 In short, the main objective is to allow professional accountants in each countries to extend their
services to other ASEAN member countries.

 Once you are an ASEAN chartered professional accountant, you can render or practice your
profession in any of the ASEAN member countries.

 PROFESSIONAL ORGANIZATIONS:
 Once you passed the CPA Licensure Exam you become a member of the Philippine Institute of
Certified Public Accountants (PICPA)
 You need to pay annual dues. Your application for accreditation will not be renewed if you have
unpaid membership fees.
 Main objective of PICPA: to protect and to provide the best interest for the members of the
organization.

 SECTORAL ORGANIZATIONS:
1. Association of CPAs in Public Practice (ACPAPP)
2. Association of CPAs in Commerce and Industry (ACPACI)
3. National Association of CPAs in Education (NACPAE)
4. Government Association of CPAs (GACPA)

 Main umbrella is the Philippine Institute of Certified Public Accountants (PICPA)

 Requirements to become a CPA: Finish BS in Accountancy and pass the CPA Licensure Exam.

 RATINGS IN THE CPA BOARD EXAM:

 For instance, you have an average of 85% but your grade in auditing is 64%, are you considered
as pass? No. You are conditional, so you are entitled for removal exam. You must take the
removal exam within two years from the date of your exam, otherwise you will need to retake
the whole exam again.
 If your average is 74% but you passed majority of the subjects, you are still entitled for removal
exam.
 If you still failed after taking two complete CPA Board Exams, you are not allowed to take the
next exam unless you showed to the PRC a certificate that you enrolled in a refresher course.
 Two complete exams means you both completely failed the two exams.
 If on your first take you are entitled to removal exam and when you took the removal exam
and you failed, that is considered as one complete exam. So, one original exam and the
removal exam is considered as one complete exam.

 Once you passed the exam you will go to PRC to claim board certificate and you will be given a PRC
ID which will be renewed every three years. When you renew you have to ensure that you have
taken at least 120 CPD units.

 Circumstance where a CPA passed the board exam, but the PRC refused to issue CPA Certificate
and PRC ID:
1. Was convicted by a court of competent jurisdiction of a criminal offense involving moral
turpitude.
2. Guilty of immoral and dishonorable conduct.
3. Has unsound mind.
4. Misrepresentation in the application for the CPA Examination.
 Example, you cheated.

 FOREIGN CPA:
 Are foreign CPAs allowed to practice in the Philippines? Generally, no. Otherwise, there should
be treaties or agreements entered between the Philippine government and the country where
that foreign CPA resides, allowing the CPAs of either country to practice their profession in that
country.
 Example, you go to Lebanon and want to practice your profession. Generally, you are not
allowed unless Lebanon and Philippines have an agreement that they allow the CPAs to
practice in either country.
 Aside from mutual agreement, there should be compliance with other requirements the same
with Filipino CPAs.

 Circumstance where foreign CPAs are issued with special and temporary permits:
1. Called for consultation or for a specific purpose essential for the development of the country,
provided that his/her practice is limited for the particular work that he/she is being engaged
and that there is no Filipino CPA qualified for such consultation or specific purpose.
2. Engaged as a professor, lecturer, or critic infield essential to accountancy education in the
Philippines, and his/her engagement is confined to teaching only.
3. Internationally recognized expert or with specialization in any branch of accountancy and
his/her service is essential for the advancement of accountancy in the Philippines.

 PROFESSIONAL STANDARDS:
1. Philippine Standards on Auditing (PSAs)
 for FS audit.

2. Philippine Standards on Review Engagements (PSREs)

 for Review engagement.
 Review engagement have lower assurance than assurance given in FS audit.

3. Philippine Standards on Assurance Engagements (PSAEs)

4. Philippine Standards on Related Services (PSRSs)

 CONTINUING PROFESSIONAL DEVELOPMENT:

 Requires all professionals to undergo CPD before they will be allowed to renew their licenses or
before they will be issued of an accreditation required by the BOA, SEC, BIR.

 CPD Programs:
1. Seminars and Workshops
2. Academic track
3. Self-directed and/or Lifelong Learning
4. Other activities to be recommend by the CPD Council and approved by the BOA and the
Professional Regulation Commission.
 CPD Units requirement: 120 units.

 MAJOR COMPETENCY AREAS OF CPD PROGRAMS:

1. Technical competence - 30 units
2. Professional Skills - 5 units
3. Professional Values, Ethics and Attitudes - 5units

 EXEMPTION FROM CPD REQUIREMENT:

1. Permanent exemption - CPA reaches the age of 65 years old unless he/she is still practicing
public accounting.
2. Temporary exemption - CPA in abroad furthering their studies or working there, provided that
they are outside the country at least 2 years prior to the date of renewal. Once they come back
to the Philippines, they are required to comply the provisions of the CPD before they are
allowed to have their ID renewed.

 PENALTIES AND SANCTION:

1. Suspension of CPA Certificate
 License is not entirely revoked
2. Revocation of CPA Certificate
3. Cancellation of Temporary or Special Permit
4. Payment of fines and/or imprisonment
 Imprisonment are imposed by the court of law, not the BOA.
 Penalties may be imposed by the BOA.
 CHAPTER 4: SETTING UP AND MAINTAINING AN ACCOUNTING PRACTICE

 In setting up your own accounting firm, you need to secure the required permit and licenses. Then
secure the requirements needed to practice public accountancy.
 If it is a partnership, you need to go first to SEC to have it registered. After securing the
registration, you’ll go to the city or municipality where the principal address your business is
located. After that, register at BIR and other government agencies like SSS and PhilHealth for your
employees.
 If you are an Individual CPA, no need to secure the permit and license from the city or municipality.
Just have it registered at the BIR to file for necessary taxes.
 If it is an individual firm you need to register it at DTI.
 Under RA 9298, the form of business organization that is allowed to be formed for practice of
public accounting: sole proprietorship and partnership.
 Corporation is not allowed under RA 9298 because the owners of a corporation are the investors
and shareholders. For instance, you want to put up an accounting office as a partnership. It is
necessary for the partners to be CPAs but in a corporation, it is not a requirement for all
shareholders to be CPAs. At the same time, the objective of a corporation is to earn profit which
could affect the quality of the services rendered by the CPAs (it becomes a commercial approach)
while in partnership or in an individual firm, the main objective is to render service to the public.
Earning profit is secondary objective only. This also applies to other professions like lawyers and
doctors.

 REQUIREMENTS IN PRACTICING PUBLIC ACCOUNTANCY:

1. Secure accreditations from the BOA
 Required to have at least 3 meaningful experience in any of the accounting sectors
 If you are a first time for accreditation, sometimes they will ask to get a certification from
the PICPA that you are a member of good standing (you must have no unpaid dues)
 They require to submit NBI clearance
 Sometimes they will ask to submit a listings of internal control policies and procedures you
will adopt to your accounting firm.
 Submit proofs that you have accumulated at least 120 CPD units every time you renew
 How many years is the validity of accreditation to practice public accountancy? 3 years.
 Reckoning date of the validity of accreditation is your date of birth.
 For a partnership, the reckoning date is the date of registration from SEC.

2. You have to keep yourself be examined by a Quality Review Committee

 Subject for review to find out if you have been performing your work as a public
practitioner efficiently and effectively in accordance with the standard.
 For instance, the financial statements you’ve affixed your signature to is reviewed and they
found out that there were deficiencies noted by the committee in your audit. It could be a
reason for your non-renewal of accreditation.
3. Secure accreditation from BIR
 Same requirements with BOA, only that, you need at least 18 CPD units on taxation and
must be taken within a year prior to the renewal of accreditation.
4. Secure accreditation from SEC
 Do this if client is a large entity, a bank, an insurance company, or an entity whose shares of
stocks are publicly traded (publicly listed clients and public interest entity clients). The QRC
is strict with these entities because the public interest is at stake.
 Audit fee is higher if SEC accredited.
5. You need to get PTR (Professional Tax Receipt) from the city or municipality where you practice
your profession annually.

 It is a requirement for an accounting teacher to be accredited by the BOA.

 Each year you must accumulate at least 15 CPD units for the period of 3 years, prior to your
renewal of your accreditation.

 Quality Review Committee (QRC) – one of the councils formed or created to assist the BOA in their
discharge of their duties and responsibilities.

 It is indicated in the audit report all required accreditations of the auditor. SEC will not accept the
financial statements filed by the client without the required accreditation numbers by the external
auditor. It is also indicated the expiry date of BIR accreditation, BOA accreditation, SEC
accreditation, your CBA accreditation.

 RULES ON NAMES:
 As an individual practitioner, you can use your name.
 As an individual firm or sole proprietorship, you can use the name registered in the DTI.
 As a partnership, you can use the name registered in SEC.

 OTHER CONSIDERATIONS IN SETTING UP ACCOUNTING FIRM:

1. Location and work environment
2. Technology
3. Hierarchy of Personnel
4. Human Resources

 ADVERTISING AND PROMOTION OF ACCOUNTING FIRM:

 A CPA should not bring the profession into disrepute when marketing professional services.
 Sources of clients is usually through referrals
  In advertising, the information should be honest and truthful and should not make
exaggerated claims for services offered, qualifications possessed or experience gained or
make disparaging references to unsubstantiated comparisons to the work of another.
 It is unethical for a CPA engaged in public practice to compare his services to the services of
his colleagues.
 Traditionally, before, it is prohibited to advertise and promote services of accountancy. It is
limited only to name, address, telephone number and professional organization you
belong. But you can’t inform the public the services you can offer.
 BOA Resolution No. 126, Series of 2008 allowed advertising and can disclose the services
offered to the public
 Must be in good taste – The way it is advertised and marketed must be satisfying,
generally accepted, social and meets aesthetic standard. (Ex: It is not in good taste
if the advertisement contains a celebrity which is not connected with the service
being advertised)
 Self-laudatory statements not allowed – it means you keep praising yourself

 Why is there a limitation imposed regarding the advertising and marketing of the services of any
profession? It’s because they are limiting the competition. Otherwise, if they allow competition, it
can affect the quality of services. And there will be unfair competition especially to individual CPAs.

 ACCEPTABLE PUBLICITY:
1. Awards
 But should not be used for personal professional advantage (ex: to invite more
clients)
2. Professional Accountants Seeking Employment or Professional Business
3. Directories
4. Books, Articles, Interviews, Lectures, Radio and Television Appearances
 Can’t disclose services offered because when you’re in television, its scope is wide.
It will be commercialized, and quality of services will be compromised.
5. Training Courses, Seminars, etc.
6. Booklets and Documents Containing Technical Information
7. Staff Recruitment
8. Publicity on Behalf of Clients
9. Brochures and Firm Directories
10. Stationery and Nameplates
11. Announcements
12. Inclusion of the Name of the CPA in Public Practice in a Document Issued by a Client
13. Anniversaries
 After every 5 years
14. Websites
 The bottom line of the regulations on the marketing of the services offered by CPAs is so that the
quality of the services offered will not be compromised. To avoid undue competition among
members of the competition. Without the regulations, the very purpose of serving the public will
be defeated.

 FEES AND BILLING:

 If the fee you charged is grossly low to the extent that you may not be able to perform the
proper audit procedure, that is not allowed. It compromises fundamental principle of
professional competence and due care.

 DEATH, DISABILITY, DISSOLUTION AND LIQUIDATION:

 The designated staff member of the Individual CPA, sole practitioner (or any designated
staff member), or managing partner of the Partnership (or any designated partner) shall
report to the BOA not later than 30 days from the date of such death, dissolution or
liquidation.
 The report shall be in the form of an affidavit with a death certificate (in case of death) for
Individual CPA or Firm.
 In case of Partnership, bring a certificate of copy of the dissolution or liquidation papers
filed with the SEC.
 Failure to notify the Board shall subject to penalties.
 CHAPTER 7: OVERVIEW OF THE FINANCIAL STATEMENT AUDIT PROCESS

 Financial Statement Audit

 Series of procedures (risk assessment, test of control, and substantive test procedures) performed
by the auditor to find out if the assertions of the management conform with the acceptable
financial reporting framework.
 The main service usually offered by CPAs engaged in public practice.
 An engagement where only CPAs are in the position to perform this type of engagement.
 Done by an independent CPA and that CPA will gather pieces of evidence to find out if the
assertions of the management are true or not. After that, he will render a report.

 If the client is a bank, an insurance company, a publicly listed entity (shares of stocks are publicly
listed in the stock exchange), or the assets of the company is P500M perhaps, the acceptable
financial reporting framework is Full PFRS.

 Assertions – claims or representations of the management regarding the financial statement that is
being subject to audit.

 Classification of Assertions on Financial Statement Level of the Client:

1. Assertion of Existence or Occurrence
 Existence - refers to balance sheet accounts such as the management ascertains
the existence of the PPE, receivables.
 Occurrence - refers to nominal accounts or income statement accounts or
comprehensive income accounts.
2. Assertion of Completeness
 Management ascertains that all transactions during the period are properly
reflected in the financial statements. They do not practice window dressing
(improving the appearance of the financial statements) or any fraudulent
reporting.
3. Assertion of Rights and Obligation
 Rights – management ascertains their ownership to those assets as presented in
the balance sheet.
 Obligation – management acknowledges that all liabilities are their obligations.
4. Assertion of Valuation
 Management claims that the accounts reported in the financial statements are
properly valued. They followed the appropriate standard of measuring those
accounts as reported in the balance sheet.
 For instance, if the company has foreign currency deposits, was it properly valued
at that date? As an auditor, you have to determine if the client really used the
appropriate exchange rate at the time the balance sheet was prepared.
  For instance, it is investment in equity insecurities at fair value through other
comprehensive income, on balance sheet date it has to be measured at market
value.
 If the client is a small entity and used the lower of cost and net realizable value in
presenting their inventory, it is not correct. It has to be stated at market value.
5. Assertion of Presentation and Disclosure
 When the management prepare the financial statements, it is properly presented.
If you are going to present the balance sheet, you have to show the details of the
line items in the notes to financial statement. That is why the contents of the
financial statements are concise, short and little amount because the details are
shown as schedules in the notes to financial statements.
 The account titles are properly labeled whether it is a current asset or non-current
asset.
 For instance, if it is not classified as cash and cash equivalents and it is considered
as a current asset; for instance, it is a compensating balance wherein it is a
restricted balance and the maturity of the loan is less than a year. It is not shown as
part of cash, but it will be shown separately as “cash held as compensating
balance” under the current asset. If the term of the loan is more than a year and
there is restriction, it is shown as “investment”.
 You can add other line items, provided that it is material and it could influence the
decision of the users of the financial statement. Example is cash held as
compensating balance (if there is restriction).

 All financial information reflecting in the financial statement is good only for December 31. That’s
why the date is presented “As of December 31”. The day after December 31, the financial position
could be different.

 What is the overall objective of the auditor in an audit of financial statements? For the auditor to
express an opinion whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework (PSA 200).

 The auditor’s opinion enhances the credibility of the financial statements. The user cannot assume
that the opinion is an assurance to the future viability of the entity nor the efficiency or
effectiveness of which the management has conducted the affairs of the entity.

 For instance, the auditor’s opinion is unqualified and after 6 months, the entity has closed its
operations. Do not blame the auditor because as of that moment, when he rendered the
unqualified opinion, it only enhances the credibility of the financial statements. On that date, there
is no indications substantially affecting the ability of the company to operate as a going concern.
Unfortunately, after the audit, there could be circumstances that have affected the operations of
the company.
 What is the responsibility of the auditor? The auditor is responsible for expressing an opinion on
the financial statements from the management or those charged with governance whether it is
fairly presented.

 Charged with governance – refers to the board of directors (the governing body of the entity).

 It is the primary responsibility of the management or those charged with governance of the
identification of the appropriate financial reporting framework to be used. While the auditor will
determine whether such financial reporting framework is acceptable.

 3 Types of Audit Procedures According to Purpose that an Auditor Performs in Financial

Statement Audit:
1. Risk Assessment Procedure
 Assess the level of risk involved in the preparation and presentation of the financial
statement.
 The auditor inquires, observes, and inspects to gather pieces of information which
will serves as his basis for assessing the level of risk involved.
2. Test of Control
 Internal control system is being evaluated.
 Example, what are their internal control policies and procedures in the handling of
cash, regarding their inventories, or their PPEs. How they are safeguarding their
assets.
 More in depth study of the client’s internal control system to validate whether the
initial assessment is validating or not.
3. Substantive Test Procedure
 Where the auditor will gather pieces of evidence.
 For instance, sending confirmation letters or performing bank reconciliation, and
the information will be used as a basis whether the assertions of the management
are true or not.

 Responsibilities of the Management and those Charged with Governance on Financial Statement
Audit:
1. For the preparation and presentation of the financial statements in accordance with the
applicable financial reporting framework. Aside from that, the management also has the
responsibility to have an internal control system that is properly designed and
implemented to have their financial information considered as reliable.
2. They also need to be cooperative with the members of the engagement team. They should
provide the auditor:
 All information, such as records and documentation, and other matters that are
relevant to the preparation and presentation of the financial statements.
 Any additional information that the auditor may request from management and,
where appropriate, those charged with governance
  Unrestricted access to those within the entity from whom the auditor determines it
necessary to obtain audit evidence.

 If you are going to ask for information, records and documentation, there must be proper planning,
and you should know who to ask for the documents. It also has to be at a time when you will not
disrupt the operations of the entity. There has to be an arrangement.

 If the management is uncooperative during the time of engagement, that is the time for the auditor
to withdraw from the engagement and perhaps issue a disclaimer of opinion. For instance, they are
not giving you the records or documents, and these are material, based on your professional
judgement.

 If the auditor experiences restrictions imposed by the management and the auditor can’t conduct
the audit properly, the auditor must approach the management and discuss the issues or concerns.
If after discussing and it remains to be unresolved, auditor will withdraw from the engagement.

 Basic Concepts Underlying a Financial Statement Audit

1. Auditor Independence
2. Professional Skepticism
3. Conduct and Scope of an Audit in Accordance with PSAs
4. Audit Evidence and Financial Statement Assertions
5. Audit Materiality
6. Audit Risk
7. Professional Judgement
8. Inherent Limitations of an Audit

 Audit Independence:
 Being independent means that he is not influenced by anybody. He is independent in mind
and in appearance.
 Being independent enhances the auditor’s integrity and objectivity.
 If for instance, you are invited by the president of the entity which is subject of audit to a
party, there is impairment of independence in appearance because there is ongoing
engagement.
 If you meet that president in accident and you’ve talked only, then there is no impairment
because it is only circumstantial.
  Fundamental Ethical Principles:
1. Integrity – he needs to be honest
2. Objectivity
3. Confidentiality
4. Professional Competence and Due Care
5. Professional Behavior

 Professional Skepticism:
 Refers to being critical and doubtful, recognizing that there are circumstances that will
cause the financial statements to be materially misstated.
 There is potential bias on the part of the management since they are the ones who
prepared the financial statement. There may be circumstances that the amounts are
manipulated or because of motives such as they want to attract investors.
 Auditor needs to perform series of procedures or gather evidences to ascertain
whether the assertion is true or not.

 Conduct and Scope of an Audit in Accordance with PSAs:

 PSA – is the guide of the auditor in performing an audit.
 What is being minimized if the auditor performs the audit in accordance with PSA? The
audit risk.
 Audit Risk – the risk of auditor issuing an inappropriate opinion.
 There may be circumstances while performing the audit, the client may be subjected to
other regulations. For instance, if the client is a bank, they have to follow the rules and
regulations imposed by the central bank. Therefore, in conducting the audit, the
auditor has to consider these rules and regulations the client is subjected to. For
instance, there is a policy of secrecy of deposits that should not be known by the
auditor or the members of the engagement team, then the auditor has to think of
alternative procedures to be able to come up with the information he needs to obtain.
 Scope of the audit – procedures the auditor will perform in that audit.
 For instance, the audit also covers the branches of the entity. The other branches will
then also be subjected of an audit.
 Audit Evidence and Financial Statement Assertions:
 Audit Evidence – information used by the auditor in arriving at the conclusions on
which the audit opinion is based.
 What is the procedure to obtain the audit evidence? Substantive test procedure.
 What is the standard attribute of an audit evidence? Sufficient and Appropriate.
 Sufficient refers to the amount or quantity of evidence needed.
 It is not necessary that there must be a complete examination of all the
records.
 In determining the amount, there are factors the auditor must consider. For
instance, how material that information is. If the degree of materiality is high,
more pieces of evidence must be obtained to have stronger conviction. If the
level of risk is high, you need to gather more pieces of evidence.
 Appropriateness refers to the quality.
 The quality has to be relevant and reliable.
 Audit evidence the auditor will use to support his opinion is mainly coming from those
information obtained by him as a result of performing different procedures and that is
corroborated by other pieces of evidences like for instance, the accounting records.

 Audit Materiality:
 Under what circumstance is information considered as material? If it affects the fairness
of the presentation of the financial statement (in the auditor’s point of view) and if its
omission could influence the decision of the financial statement users.
 Under PSA 320, there is inverse relationship between materiality level and audit risk.
 The higher the materiality level, the lower the audit risk and vice versa.
 As the auditor starts gathering evidence, he will set up the materiality level (it can be
quantified). For instance, if the aggregate of misstatements reaches the materiality
level of P500,000 then it is considered material. Therefore, the auditor has to gather
more pieces of evidence to support his opinion.
 Materiality level is a relative concept, it depends on the circumstance. For instance, the
size or nature of the entity varies the materiality level. Another instance is cash. When
you audit cash and cash equivalent, it is not the amount that matters. It could be the
entity is large, but the amount of cash and cash equivalent is now minimal. The auditor
will devote more of his time in auditing the cash and cash equivalent because of the
high degree of inherent risk that it is prone to irregularity or misappropriation.
 If the auditor considers the information is material, he will dig more pieces of evidence.

 Audit Risk:
 Audit Risk – risk that the auditor will issue an inappropriate opinion.
 To minimize the level of audit risk, the auditor will perform audit planning first.
 Factors or Components Affecting Audit Risk:
1. The risk of material misstatements of financial statements
2. Detection risk
 Likelihood that the auditor will not detect a misstatement that exists in
an assertion that could be material, either individually or when
aggregated with other misstatements.
 Function of the effectiveness of an audit procedure and of its
application by the auditor.
 How to minimize detection risk? There must be proper planning and
supervision.
 During the audit planning, detection risk is included in the activities
that the auditor, together with the engagement team, has to set up
and who is supposed to be monitoring the engagement team,
especially those who have lesser experience.
 It affects audit risk.

 Factors Affecting Risk of Material Misstatements:

1. Inherent Risk
 Susceptibility of an assertion to a misstatement that could be material,
individually or when aggregated with other misstatements assuming
that there were no related internal controls.
 Even before the audit, the risk is there already and is not imputable to
the auditor.
 Example: Client is engaged with voluminous transactions; it could be
possible that some transactions are not properly recorded.
 Example: Integrity of the management is questionable. The
management is known to engaged in illegal activities. They can
manipulate the financial statements.
 Example: The nature of the client’s business is complicated so that
there may be transactions that the accountant or bookkeeper does not
know the proper treatment.
2. Control risk
 Misstatement could occur in an assertion and that could be material,
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.
 Risk that is associated with the entity’s internal control policies and
procedures.
 Despite how well designed and properly implemented the entity’s
internal control system are, there are still limitations present.
  For instance, if the management or those in charge with governance
uses their authority to override the internal control procedures and
policies, that compromises the efficacy of the internal control policies
and procedures in place.
 Another instance is if there is connivance between management and
the employees.

 If the level of inherent risk and control risk is high, the risk of material misstatement is also high.
(Direct Relationship)
 Inherent risk and control risk are not imputable against the auditor because before the audit, these
risks are already here.
 Detection risk is controllable by the auditor imputable against the auditor because it could be
perhaps his audit procedure is inappropriate.

 Professional Judgement:
 Professional Judgement – application of relevant knowledge and experience, within
the context provided by auditing, accounting and ethical standards, in reaching
decisions about the courses of action that are appropriate in the circumstances of the
audit engagement.
 All throughout the audit, this will be used. For instance, in determining what is the
appropriate sample size, what is the appropriate audit procedure, determining the
amount of pieces of evidence, and evaluating the pieces of evidence.
 It is an inherent limitation because it could be that the judgement would not be
correct.

 Phases of the Audit Process:

1. Pre-engagement
 Carrying out initial audit activities
 Getting to know the client
2. Audit Planning
 Developing an overall audit strategy and preparing the detailed audit plan
 The output here is the audit program.
 The audit program is provisional in nature (not permanent), this will serve as a
guide on how they will carry out the engagement. If along the way, the
provision is not realistic or can’t be performed, the auditor must come up with
other alternatives.
3. Study and Evaluation of Internal Controls
 Documenting and evaluating the auditor’s understanding of the internal
control structure of the client.
 Set of procedures done here for example is flow charting or internal control
questioning, test of control (i.e. reperformance).
  This will serve as his basis in determining what is the level of control risk and
subsequent audit procedure the auditor will perform.

4. Substantive Testing
 Can’t be dispensed because it is the only way the auditor will gather pieces of
evidence.
 Example: Conduct ocular inspection, vouching, preparation of bank
reconciliation, inquiry, observation, etc.
 Test of the substance of the account balance.
5. Completing the Audit
 Wrapping-up procedures and review of audit conclusions prior to issuance of
the audit report.
 For instance, going over his working papers, the gathered pieces of evidence is
sufficient already.
 For instance, identify related parties.
 For instance, if there are subsequent events that happened after balance sheet
date. The auditor has to ascertain how it will affect the financial statement.
6. Issuance of the Audit Report
 Preparation and issuance of the audit report.
 Audit report – final output of the process.
7. Post-audit Responsibilities
 Last stage of the process where the auditor, together with the engagement
team, will gather and try to recollect what happened in the previous
engagement.

 Types of Opinion:
1. Unqualified opinion – if it is fairly presented (in consonance with the acceptable
financial reporting framework).
2. Qualified opinion – there are material misstatements, but the effect is not pervasive
(does not affect the financial statement as a whole. The effect is in confined in one
account only). The financial statement is still considered as fairly presented.
3. Adverse opinion – financial statement is not fairly presented. For instance, no
disclosure that the entity can’t operate on a going concern basis.
4. Disclaimer of Opinion – for instance, there are restrictions imposed so that the auditor
was not able to gather sufficient appropriate evidence.
 Two Factors Affecting Audit Risk:
1. Risk of Material Misstatement
a. Inherent Risk
b. Control Risk
2. Detection Risk – auditor may not be able to detect material misstatements of an
account because of inappropriate auditing procedure.

 Audit risk – risk that the auditor issues an inappropriate opinion.

 If the assessment of inherent risk and control risk is high, what is the materiality level the
auditor should establish during the planning stage? Low so that there is a higher chance
that there would be misstatements that could be leading to a material misstatement of the
information as reflected in the client’s financial statement.
 For instance, you set up P5M materiality level which is too high. Most likely, you won’t be
able to come up with misstatements approaching the P5M above. Even if you aggregate
the total misstatements of the individual accounts, the auditor will have a hard time to
come up with misstatements that could materially affect the fairness of the presentation of
the financial statement because the materiality level is so high.
 During the planning stage, he has initial assessment, now he needs to set up what should
be the materiality level for him to be able to come up with the risk of material
misstatement.
 There’s material misstatement if the amount exceeds the materiality level.
 Materiality level could be quantified (ex: it could be P1M).
 Materiality level depends on the circumstances.
 How to minimize the effect of detection risk? Proper planning and supervision.

 CHAPTER 8: AUDIT PLANNING

 Performed after agreeing with the prospective client with the terms and conditions of the
engagement.
 The public practitioner is not obligated to accept or continue to service every client. He has
to consider the integrity of the management and the auditability of the client.
 Audit process begins when a potential client contacts the auditor for a proposal on possible
engagement.
 Code of ethics prohibits client solicitation.
 Engagement letter outlines the terms and conditions of the engagement.
 Why must there be an audit planning before performing the various audit procedures? So
that the flow of the audit will be carried out in an effective and efficient manner, and it will
minimize the effect of audit risk.
 An audit plan should be developed in response to misstatements in order to ascertain the best
combination of work that will enable the auditor to arrive at a sufficient low level of risk.
 When there’s audit planning, the cost will also be minimized which will be incurred by the
members of the engagement team.
 The partner and the members of the engagement team should have to be included in the planning
and sharing the insights, their experiences, in the previous audits that took place especially if it is a
recurring audit, which could help them develop strategies, the detailed audit plan, and ultimately
the audit program which will serve as their guide in performing the different audit procedures.

 Audit Planning – establishing the overall audit strategy for the engagement and developing an
audit plan, in order to reduce the audit risk to an acceptably low level.

 For instance, there is an information that the auditor considers critical and there are alternative
procedures they can perform to obtain that information. The audit procedure they will choose
must be the one that will result to a minimum cost.

Output of audit planning:

1. Overall audit strategy
2. Overall audit plan
3. Draft audit programs detailing the work to be performed

 Audit Program – final output of the audit planning activities. It contains the audit procedures to be
carried out, be it test of control or substantive test procedures.

 Audit program must be prepared on both test of control procedures and substantive test
procedures.
 In developing an audit program for the substantive test of different accounts, it must be done
separately.

Benefits of Audit Planning (under PSA 300) :

1. Helps ensure that appropriate attention is devoted to important areas of the audit.
2. Potential problems are identified and resolved on a timely basis.
3. The audit engagement is properly organized and managed in order to be performed in an
effective manner.
4. To assist in proper assignment of work engagement team members
 5. To facilitate the direction and supervision of the engagement team members and the
review of their work
 To minimize the effect of detection risk.
6. To assist in the coordination of the work done by auditors of components and experts

 Take note that before the audit planning, there is an initial procedure performed by the auditor to
get the level of risk involved in the client’s preparation and presentation of financial statement

Factors the Auditor should Consider in Developing the Overall Audit Strategy:
1. Identify the characteristics of the engagement that define its scope
 The characteristics of the engagement being referred to is the nature of the
business of the potential client.
 For instance, if it is a bank, pawnshop, or a mining industry.
 For instance, it is a bank and it has branches, what is the scope of the engagement?
Will it cover only the main branch?
 The bank is also subjected to the laws, rules and regulations of the central bank,
the auditor should take information if they are complying with these rules and
policies. If there is non-compliance, the entity will be exposed to significant risk and
will affect the entity’s ability to operate as going concern.
 To know the acceptable financial reporting framework. For instance, if it is a bank,
the acceptable financial reporting framework is the Full PFRS.
2. Ascertain the reporting objectives of the engagement to plan the timing of the audit and
the nature of the communications required.
 For instance, the entity’s timetable for reporting to the government, agencies, and
those charged with the governance should be known by the auditor because this
will affect the reporting objectives the auditor will need to produce because the
entity’s financial statements need to be audited which will be submitted to the BIR,
SEC, or other regulatory agencies the entity is subjected to.
3. Consider the factors that, in the auditor’s professional judgement, are significant in
directing the engagement team’s efforts.
 There may be procedures already performed initially by the auditor through risk
assessment procedure such as inquiry, inspection, and observation.
4. Consider the results of the preliminary engagement activities and, where applicable,
whether knowledge gained on other engagements performed by the engagement partner
for the entity is relevant.
5. Ascertain the nature, timing and extent of resources necessary to perform the
engagement.

 Why is it important that you should know the characteristics of the audit? So that this will help the
auditor come up with appropriate audit procedures that they will solely undertake and to know the
acceptable financial reporting framework and to know the expected audit coverage including the
number and locations of the components to be included in the audit.

Major Audit Planning Activities: (OA-EIP-DDP)

1. Obtaining an understanding of the client and its environment
 Why is it important that there must be an understanding of the client and its
environment? For the auditor to be able to identify the transactions, practices, and
events the client performs which can affect the risk of material misstatement.
 You can obtain an understanding by performing the risk assessment procedures
and simultaneous with study and evaluation of the client’s internal control system.
 How do you call the audit procedure in obtaining an understanding of the client
and its environment including its internal control system? Risk assessment
procedure. Example, you’ll have to inquire, interview, inspect, observe, and
perform analytical procedures.
2. Assessing the possibility of non-compliance
 What do you think is the non-compliance about? What is being not complied? Non-
compliance about the PFRS, the laws and regulations.
 The auditor checks if the client follows the laws and regulations.
 For instance, you are engaged in trading or manufacturing, the client may not be
properly registered in regulatory agencies.
 If it is a manning agency, they are regulated by the Philippine Overseas
Employment Administration (POEA).
 If it is a mining industry, they are regulated by the Department of Environment and
Natural Resources (DENR).
 The client’s non-compliance could significantly affect their ability to operate as a
going concern because at any moment in time, the client can be subjected to
closure.
 If the auditor still accepts the client even if he knows that they are engaged in
fraudulent activities and are not complying, the ethical principle of integrity is
compromised, and his license may be revoked or suspended if found out.
3. Establishing materiality and assessing risk
 The purpose of establishing the materiality level is to be able to know if there are
material misstatements.
 There’s inverse relationship between the level of inherent and control risk against
the level of materiality the auditor needs to set up.
 If the assessment of the level of risk is high, materiality level must be low. Because
if the level of risk is high and the materiality level is also high, then the auditor may
not be able to discover material misstatements.
  Materiality is a concept that the auditor considers throughout the audit.
 If information is material or critical, auditor needs to gather more pieces of
evidence.
 When establishing the overall audit strategy, the auditor shall determine
materiality for the financial statements as a whole, not to individual accounts.
Because if you set up the materiality per individual accounts you can’t determine
the material misstatements.
 If the aggregated misstatements exceed the materiality level set up, it is not
tolerable anymore and there is material misstatement. It will affect the subsequent
audit procedures.
 If in a certain account, there is misstatement of information and, based on the
auditor’s judgement, it could affect the fairness of presentation of the financial
statement as a whole, the materiality level set up for the financial statement as a
whole would be ignored. The auditor will set up a materiality level for that
particular account only.
4. Identifying related parties
 What is the significance of the auditor identifying the related parties during the
planning phase? Because this could result to a high risk of material misstatement
because the transactions between the related party may not be properly
accounted or reflected in the financial statement because they are a related party.
 The auditor and engagement team will think of audit procedures to uncover any
irregularities entered into between the client and the related party which could
affect the fairness of the presentation of the financial statement.
 It is a requirement to disclose in the notes to financial statements who are the
related parties.
 Examples of related parties: Joint venture; if you’re the investor, the associate is
the related party; for instance, the other party in the contract is the wife of the
president of your client then the president is a related party and also the wife.
 Procedures the auditor could perform to identify the related party: inquire with
the management, inquire with the predecessor auditor, observation, inspection,
reading of contract, reading minutes of the meeting, review of the stockholder’s
listings, review of material investment transactions.
5. Performing preliminary analytical procedures
 Analytical procedure is a risk assessment procedure alongside with inquiry, observation
and inspection and it can also be a substantive test procedure but never a test of
control procedure.
 Analytical procedure is considered as a risk assessment procedure if it is performed
during the early phase of the audit such as during the pre-engagement or audit
planning. It will guide the auditor where the potential areas of material misstatements
are.
  As a substantive test procedure, the analytical procedure could be used to ascertain
whether an account balance is reasonable or not by performing financial statement
analysis.
 Analytical Procedure – study of plausible relationship of financial statement data for
the current year and previous year so that the auditor can apply ratio analysis or
financial statement analysis so that the results of the analysis could serve as a basis for
the auditor, together with the members of the engagement team, where areas of the
audit should have to be more devoted.
 For instance, the result of the inventory turnover last year is 5, but the current year it
became 50, so the difference is significant because ratios are supposed to be relatively
constant from period to period. There could be a transaction that is considered as
unusual. This will guide the auditor and the engagement team on where to concentrate
their audit.
 The results of the analytical procedure used as risk assessment will serve as a guide for
the auditor where there are areas of concern, in which they are concentrated to
because based on the results of the analysis, the material misstatement risk is high. In
short, it will lead the auditor and the engagement team on where to focus more
especially if there is suspicion of fraud.
 Examples of Financial Statement Ratios: Current ratios, quick asset ratio, debt to
equity ratio, inventory turnover, accounts receivable turnover.
6. Determining the need for experts
 Why is there a need for the auditor to ascertain whether the nature or
characteristic of the engagement is requiring the services of the expert? As an
accountant, there are areas that you are not knowledgeable about. If the
information or evidence that you obtain from the expert could be critical then that
should be taken into consideration during the planning stage. And for you to know
whether on how much is the budget needed for that expert.
 Under what circumstance will the engagement need an expert? If the auditor can’t
come up with an appropriate opinion or decision or to draw a conclusion.
 For example, client is a pawnshop, so their inventory is very critical. If you do not
have the knowledge of appraising the inventories’ value, then you can’t come up
with the proper valuation of those included in the financial statement if you won’t
hire the expert in that field.
 If the client is the one that hires the services of the expert, the auditor needs to
evaluate the expert’s competence, objectivity and independent because auditor
needs to exercise professional skepticism. Or get a second opinion from another
expert.
7. Development of the overall audit strategy and detailed audit plan
 Audit Strategies - refer to designing the optimized audit approaches that seek to
achieve the necessary audit assurance at the lowest cost within the constraints of
the information available.
 Auditor needs to consider the cost-benefit concept.
  Detailed Audit Plan – addressing the various matters identified in the overall
strategy, taking into account the need to achieve the audit objectives through the
efficient use of the auditor’s or the auditing firm’s resources.
 If the assessment of level of risk is high, the nature of the substantive test
procedures should be more of quality so the results of the evidence is more
reliable, and in terms of timing, audit procedures should be performed towards
year end.
8. Preparation of preliminary audit programs
 Audit programs are provisional in nature. During the audit, it could be subjected to
amendment or modification because there could be circumstances where the
procedures included in the audit program could not be performed because of
limitations or rules, laws, and regulations the client is subjected to.

Steps in Applying Materiality:

 During the Planning
1. Establishing a preliminary judgement about materiality
 Based on the initial procedures performed by the auditor. If the inherent
risk and control risk is high, materiality level and detection risk is low for
the auditor to be able to detect material misstatement.
 There’s an inverse relationship between risk of material misstatement and
detection risk. If risk of material misstatement is high, then detection risk is
reduced by increasing substantive test procedures to obtain more evidence
because the tolerable misstatements is reduced.
2. Determine tolerable misstatement
 Tolerable misstatement – aggregate of misstatements that is below the
materiality level set up by the auditor.
 At Audit Completion
3. Estimate likely misstatements and compare the totals to the preliminary
judgement about materiality.
 If the aggregate of misstatements is approaching the materiality level set
up, the auditor has to exercise professional skepticism and think of
performing extra audit procedures to settle his skepticism on whether
there are misstatements that could materially affect the fairness of the
presentation of the financial statement because there could be
misstatements not noted or detected. Had this been detected, the
aggregated misstatements would exceed the materiality level set up which
could affect the type of opinion the auditor will issue.

Materiality Criteria Often Used by Selected Practicing Auditors:

1. Percentage effect on net income before taxes – most common
2. Percentage effect on total revenues
 3. Percentage effect on total assets

Factors to be Considered in Assessing the Level of Material Misstatement Risk:

1. Control Risk
 Study and evaluate the client’s internal control system
 Example: Reperformance. For example, the auditor will select a few transactions
and will be subjected to study and evaluation on how it was carried out initially
until the transaction is completed and how it was recorded in the accounting
system. For example, if it is a policy to have two authorized signatories, the auditor
will need to find out if the two authorized signatories are properly affixed.
2. Inherent Risk
 Example: Integrity of the management, nature of the environment
 Beyond the control of the auditor

Steps in Financial Statement Audit: [PASS-CIP]

1. Pre-engagement
2. Audit Planning
3. Study and Evaluation of Internal Controls
4. Substantive Testing
5. Completing the Audit
6. Issuance of Audit Report
7. Post Audit Responsibilities

 What do you call the audit procedures the auditor will perform during the audit planning to have
thorough understanding of the client and its environment together with the client’s internal control
system? Risk assessment procedures. For example: inquiry, inspect, and performing analytical
procedures.

Audit Procedures Performed Throughout the Audit:

1. Inquiry
2. Inspection
3. Observation

Types of Analytical Procedure:

1. Risk Assessment Procedure
2. Substantive Test Procedure

 If the client is recurring, audit can be performed during the interim period.
 For instance, October 1 you started to audit and the end of the reporting period is December 31.
The intervening period is October 1 to December 31. If you perform substantive test procedures
during the interim period, you need to consider the incremental risk (the risk that may arise during
 the intervening period). Auditor still has to perform procedures during the intervening period to
ensure that there are no transactions that could materially affect the fairness of presentation of the
financial statement.
 During the intervening period, the procedures the auditor performs is not extensive. Auditor
merely reviews, inquire, inspects, performs vouching because his initial assessment of risk is low. If
risk is high, audit should be performed at year end.

Other Planning Considerations:

1. Arrangements for Company Assistance
 The auditor does not know where the documents are located so they need the
company’s assistance.
2. Consider the Work of the Internal Auditors
 Because the internal auditors are in charge on whether the entity is complying with
the rules, policies and regulations developed by the entity.
3. Direction, Supervision and Review
 Members of the engagement team who have experience are the ones who monitor
and supervise the members who have less experience.
 CHAPTER 9: STUDY AND EVALUATION OF INTERNAL CONTROL:

 Study and evaluation of internal control is simultaneous with obtaining an understanding and
knowledge about the entity and its environment.
 There is a need for evaluation of internal control system for the auditor to identify and assess the
risk of material misstatements brought by the client’s internal control system.
 Management is responsible for internal control procedures and ascertains that their internal
control system is properly designed and implemented (which is shown in the audit report).

Objectives of the Auditor in Obtaining an Understanding of the Client’s Internal Control:

1. Identify types of potential misstatements in the financial statements
2. Identify factors that affect the risk of material misstatements in the financial statements
3. Design the nature, extent and timing of further audit procedures (tests of controls and
substantive tests)

 If control risk is low, in terms of nature, perform less effective substantive test procedure (ex:
review, inquiry, observation, performing analytical procedures). In terms of extent, less extensive
audit procedure. In terms of timing, audit procedures can be performed during the interim period.
 If control risk is high, the nature of substantive test procedure is more effective (even if it is costly
and if it is the only procedure). In terms of extent, it has to be more extensive. In terms of timing,
audit procedures should be performed at end of accounting period.
 Primary consideration of the auditor in studying and evaluating internal control is to find out if the
internal control policies and procedures can prevent or detect or correct errors on a timely basis
because it can affect the client’s financial statements.

 Internal Control – process designed and effected by those charged with governance, management,
and other personnel to provide reasonable assurance about the achievement of the entity’s
objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations,
and compliance with laws and regulations.

 The management, those charged with governance, and other personnel are the ones who develop
the internal control system.
 Why is internal control a process? Because it is a means to an end, meaning, internal control is part
of the process of a certain transaction. A transaction can’t be completed without applying internal
control policies and procedures. For example, cash disbursement. Before a check is delivered to a
supplier as payment, it has to be signed by those authorized signatories as part of the internal
control policies. If there are no signatures, then the check can’t be issued, hence, transaction can’t
be completed.
 What do you mean by internal control involves people? Internal control is developed by the people
within the organization such as the management, those charged with governance, and employees.
And to carry out the policies and procedures of the internal control system, these people
implements these policies and procedures to achieve the business’ objectives which are the
reliability of financial reporting, effectiveness and efficiency of their operations, and in complying
the laws, rules and regulations. In short, these people develop, implement and execute the internal
control policies and procedures.
 Why internal control provides reasonable assurance only in attaining the entity’s objectives?
Because of inherent limitations of internal control.

Examples of Limitations of Internal Control:

o There’s connivance between management and employee
o Management themselves, or those charged with governance, use their authority to
override policies.

Objectives of the Entity:

1. Reliability of Financial Reporting (Financial Reporting Category)
2. Effectiveness and Efficiency of their Operations (Operations Category)
3. Compliance with Laws, Rules and Regulations (Compliance Category)

Components of Internal Control:

1. Control Environment
2. Risk Assessment Process
3. Control Activities
4. Information System and Communication
5. Monitoring of Controls

 Control Environment:
 Sets the tone of an organization, influencing the control consciousness of its people. It is the
foundation for all other components of internal control, providing discipline and structure.
 Reflection of the various control policies established.
 Those charged with governance and the management are responsible for the detection and
prevention of fraud and error and also the establishing of a strong control environment.
 Control environment is the first component that the auditor observes when touring the
client’s facility.
Elements of the Control Environment:
1. Communication and enforcement of integrity and ethical values
 What control should the company has to ensure that people within the
organization have ethical behavior and integrity? Integrity and ethical
values are expressed through:
1. Existence and implementation of codes of conduct and other
policies regarding acceptable business practice, conflicts of
interest, or expected standards or ethical and moral behavior.
2. Dealings with employees, suppliers, customers, investors,
creditors, insurers, competitors, and auditors.
3. Pressure to meet unrealistic performance targets and extent to
which compensation is based on achieving those performance
targets.
 Integrity is a prerequisite because if you are not honest and straight
forward, how will you be able to comply with ethical fundamental
principles.
2. Commitment to competence
 To ensure high standard of best practice for the company, the entity should
install a process of selection in hiring.
 Management should consider the competence levels for particular jobs.
 It is important to conduct employee training.
3. Participation by those charged with governance
4. Management’s philosophy and operating style
 In financial management, what is the ultimate objective of the
management in their operations? To maximize shareholders wealth.
 If that is the case, does it mean only the interest of the shareholders are
taken into consideration? No. If the interest of the shareholders is the
primary consideration of the management, it doesn’t mean the interest of
the other stakeholders are not compromised because whatever amount
that is left after giving what is due to other stakeholders (employees,
customers, suppliers) is given to the shareholders in the form of dividends
and the growth in the value of the entity’s shares of stocks.
 If management’s objective is to maximize profit, they will venture into
activities which will be characterize as highly risky investments. It will affect
the growth of the values of the shares of stocks because investors do not
like highly risky investments. Potential investors are not attracted.
5. Organizational structure
 Provides overall framework of the planning, executing, controlling and
monitoring activities performed by the management.
 Formal organizational structure is often denoted in organizational chart.
 Important aspects of organizational structure:
 1. Centralization of authority
2. Assigning of responsibility of a specific task
3. The way responsibility allocation affects management information
requirements
4. Organization of accounting and information system functions
6. Assignment of authority and responsibility
 Management assign authority and responsibility within the organization
that are congruent to the management’s philosophy and operating style.
 Authority and responsibility may be assigned through formal job
description, employee training and operating plans, schedules and
budgets.
7. Human resources policies and practices
 Send messages to employees regarding expected levels of integrity, ethical
behavior and competence.
 Human resources practices and policies suggest to the employees what the
entity expects in terms of integrity, ethical behavior and competence.
These policies describe how the organization hires, trains, evaluates,
promotes and compensates employees.

 Entity’s Risk Assessment Process:

 Identification and analysis of relevant risks to achievement of the objectives, forming a
basis for determining how the risks should be managed.
 Processes:
1. Risk Identification
 The entity has to counter the identified risks by having safety measures
such as contingent plans which will decrease control risk.
2. Risk Analysis and Management
 The identified risks will be subjected to analysis by estimating the
significance of the risk and assessing the likelihood of occurrence of these
risks and considering how these risks will be managed.

 Control Activities:
 Policies and procedures, which are the actions of people to implement the policies, to help
ensure that management directives identified as necessary to address risks are carried out.
 Internal control policies and procedures implemented to address risks.
 Example of control activities:
1. Performance Review
 To minimize significant difference between actual and forecast or the
variance.
2. Information Processing
3. Physical controls
4. Segregation of duties
 Information System and Communication:
 Consists of infrastructure, software, people, procedures and data.
 Provide relevant and timely information and communication.
 The system should identify information requirements and create information system that
provides the needed data.

 Monitoring of Control:
 Why is there a need to monitor control? To ensure that the control activities are in place,
adequate, operating effectively and if they are still relevant.
 Helps the management determine what modifications to the system are needed as
conditions change.

Steps in Study and Evaluation of the Client’s Internal Control:

1. Obtaining an understanding of the client’s internal control structure
2. Make a preliminary assessment of control risk
3. Determine the appropriate response to the assessed risk
4. Reassess control risk
5. Determine the nature, extent and timing of substantive tests

 Obtaining an understanding of the client’s internal control structure:

 This is only a risk assessment procedure (ex: inquiry, observation and inspection)
 Activities done:
1. Performing a preliminary review
2. Identifying transaction cycles
3. Documenting the system
 Ways to document the system:
1. Narrative
2. Questionnaire
3. Flowchart
4. Performing a transaction walkthrough
 Auditor selects a transaction and tracing it through the accounting
information from the time it was executed or authorized and eventually
reported in the financial information and eventually the financial
statement.
 For instance, cash disbursement system was looked into and the
accounting policy is for a P500k disbursement, certain people are
authorized to sign for the disbursement to be valid. Auditor needs to check
if the signatures are there. Auditor will check from the time it was
authorized – the purchase orders, purchase requisitions are there;
 shipment of the goods; upon delivery, voucher is prepared until such time
a check is prepared for the payment; and how it is recorded in the financial
information system.
 Its purpose is to identify specific control procedure or to confirm an
existing understanding of a control procedure.
5. Identifying controls that are potentially reliable
 Auditor has to identify controls that are potentially reliable because the
aspects of internal control where it is reliable are the subject later on
where the auditor will perform test of control because assessment of
control risk is low. Auditor will validate if it is reliable because it is possible
assessment at first is low but later on the risk is high after performing test
of control. There is no test of control to those controls that are not
effective.

 Make a preliminary assessment of control risk

 Process of evaluating the effectiveness of the client’s accounting and internal control
system in preventing, detecting and correcting misstatements.

 Determine the appropriate response to the assessed risk:

 Depends on the assessment of control risk.
 If control risk is low, use reliance approach (test of control) to validate.
 Examples: Inquiry, observation, inspection, and reperformance (similar to
walkthrough)
 If control risk is high, use no-reliance approach (substantive test procedure).

 Determine the nature, extent and timing of substantive tests:

 Dependent of assessed risk.
 If control risk is high, more effective substantive test procedure, more evidence needed,
and performed during the end of the accounting period.
 If control risk is low, less effective substantive test procedure such as review, inquiry,
observation, inspection, performing analytical procedure. Less extensive substantive test
procedure, and can be performed during the interim period but you have to be aware of
the incremental risk. Therefore, during the intervening period, auditor has to perform
procedures but the nature is less effective such as review, vouching, reconciliation and
performing analytical procedure.

 Deficiency in Internal Control:

 Auditor has to bring the matter to the management, in writing, and note the deficiencies.

REVIEW:
 What is the appropriate response if control risk is low? Test of control.
 Is test of control dispensable? Yes, when the control risk is high.
REVIEW:
Audit Procedure According to Purpose:
1. Risk Assessment Procedure
2. Test of Control
3. Substantive Test Procedure

 When is test of control done by the auditor? If control risk is low to validate if the initial assessment
is really low. It tests the operating effectiveness of the internal control system.
 What is substantive test procedure? Audit procedures performed to detect material misstatements
at the assertion level.

 Examples of substantive test procedure:

 If auditor wants to ascertain the correctness of the accounts receivable balance at
assertion level, the more appropriate substantive test procedure is sending confirmation
letters to customers.

 CHAPTER 10: SUBSTANTIVE TESTING AND DOCUMENTATION:

 Covered by PSA 500 in gathering pieces of evidence.

 Attributes of evidence are sufficient and appropriate.

 Sufficiency - refers to quantity of evidence.

 In determining the sufficiency of the audit evidence needed for the auditor to draw a conclusion,
what normally does the auditor uses? Professional judgement.
 Regardless of level of control risk, substantive test procedures must always be prepared because
this is the only way for the auditor to gather evidence.

 Audit Evidence:
 All the information used by the auditor in arriving at the conclusions on which the audit
opinion is based and includes the information contained in the accounting records
underlying the financial statements and other information.
 Cumulative in nature and ordinarily obtained from audit procedures performed during the
course of the audit.
 The sources of evidence mainly come from the results of the audit procedures performed
by the auditor such as inquiry, inspection, sending confirmation letters, reconciliation,
vouching, etc.
  There are other pieces of evidence that the auditor will be using such as the accounting
records and documents. These may also corroborate the pieces of evidence that the
auditor obtained while performing substantive test procedures.
 Corroborating Evidence – evidence which complements or supports an assertion which is
already supported by another type of evidence.
 Mere inspection, inquiry and observation are not sufficient evidence.

 Under what circumstance will risk assessment procedure be performed? Why is there a need for it
to be performed? To obtain an understanding of the entity and its environment and to assess the
level of risk involved in the internal control system.
 The assessment of level of risk involved, whether high or low, will influence what the next
procedure the auditor will perform. So, if control risk is high, auditor will take into consideration
the nature, extent and timing of the substantive test procedure.
 Another term for test of control is reliance approach. It is done if control risk is low. The auditor
will make a validation of his initial assessment by going through a more in-depth study of the
client’s internal control system

2 Types of Substantive Test:

1. Substantive Analytical Procedure
 To ascertain whether the account balance is reasonable or not by his performing
analytical procedures such as ratio analysis.
2. Test of Details of Classes of Transactions, Account Balances and Disclosures
 To test whether the specific account balance is correctly stated by sending
confirmation letters, physically observing and counting the inventory.

 Can an analytical procedure be used as risk assessment procedure? Yes.

 The results of the preliminary analytical procedure used as a risk assessment procedure will guide
the auditor where the potential areas of material misstatements are. For instance, normally, ratios
from period to period should be relatively constant so that if there is a significant difference
between the current and previous year, there is an indication that an unusual transaction have
happened which resulted to significant variation in ratio. Therefore, that area will guide the auditor
where he will focus on his audit. It is also considered in preparing the audit program.

 Substantive Analytical Procedure:

 These are used to examine specific relationship among accounts and operating data in
order to provide indication of the accuracy of specific account balance.
 Is often applied to accounts in the income statement.
 These procedures are useful for testing estimates based on future events.
 For instance, test of allowance of doubtful accounts by estimating the percentage of
accounts that will not be collected based on the client’s prior collection history.
  Another instance, auditor want to ascertain the reasonableness of the interest expense
reported in the income statement. The auditor will test the computation of the interest
expense by estimating the correct amount of interest incurred using information about
loans and interest rates so that the average interest rate multiplied by the average loan, for
instance, it has to be yielding a number close to the correct amount of interest expense.
 Its purpose is to ascertain whether that account balance is reasonable by performing for
instance, ratio analysis. Auditor will make his own computation and if the result of his own
computation is near the amount presented in the financial statement then the amount
presented is reasonable.

 Test of Details of Classes of Transaction, Account Balances and Disclosures:

 These are performed to test whether individual transactions have been correctly recorded.
 Example, auditor will verify sales transactions by examining documents related to the
transaction. Such test may include verification of the customer order, product shipment,
product prices, and subsequent collection of customer’s accounts.
 Auditor will choose few transactions. For instance, auditor is examining accounts
receivable. To test whether the balance is correct, the auditor will select few transactions
that has relation to the revenue cycle or the accounts receivable.
 In terms of Test of Details of Account Balances, these are at financial statement or
assertion level. The appropriate substantive test procedure is sending confirmation letters,
perform bank reconciliation or proof of cash, conduct cash count.
 In terms of Test of Details of Disclosures, this has relation to the information that is
supposed to be disclosed in the notes to financial statement.

 What is the relationship between audit evidence to management assertion? Audit evidence should
be relevant to the management assertion.
 If audit evidence is relevant to the assertion, what is avoided? To minimize detection risk and
erroneous conclusions.

Assertions of Management at Assertion Level:

1. Existence or Occurrence
 Existence refers to balance sheet accounts while occurrence refers to income
statement accounts.
2. Completeness
 Management ascertains that all transactions during the period are properly
reflected in the financial statements.
 Substantive test procedures performed to test this assertion is cut-off tests.
3. Rights and Obligations
 Rights refer to assets and that the entity owns them as of that period. While
obligations refer to liabilities and that the entity is acknowledging their debts.
 4. Valuation
5. Presentation and Disclosure

 Cut-off Test – Auditor will select few transactions that happened few days before and after balance
sheet date to find out if there’s any window dressing.

 Sufficiency of Evidential Matter:

 Does not require for the auditor to examine all transactions, unless certain circumstances
warrant that there must be complete examination. Especially if the transactions are
minimal only.
 Amount of evidence depends on professional judgement.
 If risk of material misstatement is high, more pieces of evidence needed. (Direct
Relationship)
1. Inherent risk
 This is your initial assessment when you perform the risk assessment
procedure.
 Example: Questionable integrity of the management
2. Control risk
 Example: Management overrides the internal control policy.
 Sufficiency of evidence is influenced by factors such as:
1. Degree of risk of misstatement – direction relationship
2. Materiality of the item – direction relationship (More material, more evidence)
3. Experience gained during the previous audits
4. Results of auditing procedures
5. Type of information available

 Appropriateness of Evidential Matter:

 It has to be relevant and reliable.
 To be relevant, it has to affect the auditor’s ability to accept or reject a specific financial
statement assertion.
 Reliability – quality of information that assures that information is reasonably free from
error and bias and faithfully represents what it purports to represent.
 Reliability of evidence is influenced by factors which are the generalization about the
reliability of evidence:
1. Independence of the source
2. Qualification of the source
 Example you are auditing accounts payable balance, and you inquire with
the manager and with the accounts payable clerk but their answers are
inconsistent with one another. If you are going to evaluate, which is more
reliable? Information from the accounts payable clerk because he has
direct knowledge about the information regarding the accounts payable of
the entity.
 3. Internal control
4. Nature of evidence
5. Form of the evidence

 Information Produced by the Entity:

 Auditor needs to validate the information whether it is true or not.
 Auditor needs to exercise attitude of skepticism if an expert is hired by the management
and may perhaps get a second opinion to validate.

 Evaluating Audit Evidence:

 If there are still inconsistencies after performing additional audit procedures, the audit
report can’t be prepared until all issues regarding inconsistencies of information are
resolved.

 Nature, Timing and Extent of Procedures:

 Dependent on the results of the previous procedures such as risk assessment and control
risk.

Audit Procedures According to Nature:

1. Inspection of Records or Documents
2. Inspection of Tangible Assets
3. Direction of Test
4. Observation
5. Inquiry
6. Recalculation
7. Re-performance – test of control
8. Confirmation – test of details of account balance (substantive test procedure)
9. Analytical Procedures

 Positive Confirmation – asks the respondent to reply to the auditor in all cases either by indicating
the respondent’s agreement with the given information, or by asking the respondent to fill in
information.
 Negative Confirmation – asks the respondent to reply only in the event of disagreement with the
information provided in the request.

 What is the difference between positive and negative confirmation? In positive confirmation there
is reply and it is more reliable. In negative confirmation, respondent will only reply if the
information presented is not correct. If there’s no reply, there’s an assumption that the respondent
acknowledges that the information is correct.
 The risk in positive confirmation is that the respondent may reply without verifying the
information.
 The risk in negative confirmation is that there’s no physical evidence if the confirmation is received
by the respondent.
 Under what circumstance will a negative confirmation be sent? If risk of material misstatement is
low and a large number of errors is not expected.
 Under what circumstance will the auditor send confirmation to management? Aside from being
additional evidence, auditor will send confirmation to management to confirm a certain item
especially if it is very critical and material. Take note, that confirmation is not sufficient and will not
constitute a sufficient appropriate evidence because it is unlikely that the management will give
information that will discredit their assertions.
 What if the management did not accept the confirmation? What will the auditor do? If reason is
justifiable, auditor will think of alternative audit procedures. If not justifiable and prevented from
carrying out the confirmation, auditor should consider the possible impact on the auditor’s report.
It will constitute a limitation on the scope of the auditor’s work which he will take into
consideration whether to issue a qualified opinion, adverse or disclaimer of opinion. If client is a
bank and their reason is because of bank secrecy based on Banko Sentral ng Pilipinas, then their
reason is justifiable.

 Fraud and Error:

 Fraud – intentional
 Error – unintentional
 Responsibility of prevention and detection of fraud and error rests with both management
and those charged with governance. It will never be shifted to the auditor.
 If auditor is unable to complete the engagement as a result of misstatement resulting from
fraud or suspected fraud, discuss with the management first before withdrawing.

 Auditing Accounting Estimates:

 Client can use accounting estimates as an opportunity for fraud.

 Preparing the Substantive test Audit Program:

 Audit program can be test of control or substantive test.

 Audit Documentation or Working Papers:

 These are the record of audit procedures performed, relevant audit evidence obtained, and
conclusions the auditor reached.
 Must be kept by the auditor as proof that you conducted the audit.
 Personal property of the auditor.
 According to Philippine Standards Quality Control (PSQC), the working papers must be kept
not shorter than 7 years from the date of audit report.
 Classified as permanent file and current file.
 CHAPTER 11: BASIC AUDIT SAMPLING
 When the auditor performs test of control and substantive test procedures, the auditor has to
ascertain on what could be the appropriate method for selecting items for testing.
 Test of details refer to substantive test procedures.
 Selecting items for testing is not for risk assessment procedure because you don’t conduct testing
at the early stage of the engagement (at the pre-engagement and audit planning stages). You only
get the “feeling” on what is the level of risk by performing these risk assessment procedures.
 It is required for the auditor to obtain sufficient and appropriate audit evidence to be able to draw
reasonable conclusion on which to base the audit opinion. In forming the audit opinion, the auditor
does not examine all the information available because conclusions can be reached using sampling
approaches and other means of selecting items for testing.

Means of Selecting Items for Testing Which are Available to the Auditor (PSA 500):
1. Selecting all items
2. Selecting specific items
3. Audit sampling

 Auditor can use a combination of the three means.

 Selecting All Items (100% Examination)

 Examine the entire population.
 Under what circumstance will this be appropriate?
 If population consists small number of large value items
 When there is a significant risk or inherent and control risk are high and other
means of not provide sufficient appropriate audit evidence
 When the receptive nature of a calculation or other process performed
automatically by an information system makes a 100% examination cost
effective
 Common in substantive test procedure

 Selecting Specific Items

 Is there any attribute of the population the auditor may consider for them to be
selected for testing? Yes. The auditor may decide to select specific items from the
population based on such factors as the auditor’s understanding of the entity, the
assessed risk of material misstatement, and the characteristics of the population being
tested.
 Commonly used by the auditor when he considers the attribute of the population to be
subject of examination.
 The attributes will depend on the auditor’s judgement. Example is if he wants to
examine suspicious attributes. For instance, he noticed that many checks are pay to
 “cash” or payable to “payee”. It is suspicious because anyone who holds these checks
can be encash in the bank.
 Examples of attributes:
1. High value or key items
2. All items over a certain amount
3. Items to obtain information
4. Items to test control activities
 In selecting specific items, the auditor takes into account factors such as knowledge of
the client’s business, preliminary assessment of inherent and control risk, and the
characteristics of the population being tested.
 Whatever the result of the sample tested in that attribute; it will not be projected to
the entire population. Auditor still needs to consider performing procedures on the
remainder of the population that are not subjected for examination.
 Example: You only tested accounts receivable for P1M and above but there are many
small accounts than the high valued items (the P1M and above accounts) so that when
you aggregate these small accounts, they are higher than the high valued accounts.

 Audit Sampling
 Most common method that auditors use.
 All population have equal chance of being selected because it is done randomly.
 How will the auditor evaluate the result of the sample tested? Will the results of the
sample tested be projected to the entire population? Yes. The result of the sample
tested is representative of the entire population.
 Example, auditor chose 30% only, the result from that 30% applies to the remaining
70%.
 Auditor will use his judgement on what could be the appropriate sample size. It
depends on the materiality of the item or the level of risk involved. The higher the
materiality (material information) or level of risk involved, the higher sample size the
auditor needs to test.
 There is risk involved in using audit sampling called sampling risk.
 Sampling Risk – the risk that the results of the sample tested may not be representative
of the entire population.
 Sampling risk is one of the reasons why auditor can’t issue absolute assurance.
 How will the auditor minimize the effect of sampling risk? Increase sample size.
 Sampling risk is attributable to the auditor because he has control over this audit
sampling.
 Non-sampling Risk – risk that is not associated with the use of sampling.
 Example of non-sampling risk: Use of inappropriate substantive test procedures
performed by lesser experience members of the engagement team
 How to minimize the effect of non-sampling risk? Proper monitoring, proper planning,
etc.
 Factors that Affect the Risk of Material Misstatement:
1. Inherent Risk
 A factor that the auditor can consider in assessing inherent risk is considering the
nature of the operations of the client. The client may be engaged in transactions
that are complex and the accountant doesn’t know the proper treatment to those
transactions.
 There are rumors that the client is engaged in illegal activities. Their integrity is
questionable. It is possible that their financial statements are manipulated.
2. Control Risk
 Management or those charged with governance overrides internal control policies
using their authority.

Factors that Affect Detection Risk:

1. Sampling Risk
2. Non-sampling Risk

 In selecting items for testing, this is applicable only to test of control and substantive test
procedure.

 In relation to sampling risk, when the auditor makes use of audit sampling, what could be the effect
if the assessment is that control risk is too high but it turns out that control risk is actually low?
(Meaning, the auditor assessed that the result of the sample tested is negative or unfavorable, but
if he tested the rest of the population the result is favorable) The effect is over auditing. Because
the result of control risk is too high, the auditor will perform more extensive substantive test
procedures which will affect the audit efficiency and is more costly. And he may draw an
inappropriate conclusion.
 What if control risk is low but it is actually high? The effect is under auditing. The auditor will
perform less effective audit procedures and will perform test of control.

 What is Risk of Incorrect Rejection in relation to sampling risk? When there is risk of incorrect
rejection, the result of the sample tested is negative or unfavorable, but if the auditor tested the
remaining population, it is positive. The effect is over auditing. Auditor will perform more extensive
audit procedure and will affect audit efficiency.
 What is Risk of Incorrect Acceptance? The result of the sample tested is positive or favorable, but in
reality, it is negative or unfavorable. The effect is under auditing. The auditor will issue unqualified
opinion and the public will be misled.
 General Approaches to Audit Sampling:
1. Statistical Sampling
 Auditor uses laws of probability to aid the auditor in designing an efficient sample,
in measuring the sufficiency of evidence obtained, and in evaluating the sample
results.
2. Non-Statistical Sampling
 Auditor does not use laws of probability and uses professional judgement.
 Stratification
 It stratifies the population by subdividing the population into discrete sub-population which
have an identifying characteristic.
 Its objective is to reduce the variability of items within each stratum.
 Will the result of the sample tested in a particular stratum be projected to the other
stratums? No.

 Nature and Cause of Errors

 It could be possible in the course of the audit, there may be circumstances that control
policies are not properly implemented.
 If there are errors discovered, it is not projected to the entire transactions during the
accounting period. Auditor needs to understand these matters and also needs to consider
matters such as:
1. Direct effect of identified errors on the financial statements
2. The effectiveness of internal control and their effect on the audit approach when,
for example, the errors result from management override of a control.
 In analyzing the errors discovered, the auditor may observe that many have a common
feature. The auditor has to perform more procedures because it could be possible that the
results of these errors are from certain circumstance. For instance, there could be
computer breakdown. Therefore, the auditor will consider this as an isolated case or
anomalous error. Therefore, auditor can’t project that the entire control system is
ineffective because the result of risk assessment will be high.

 Projection of Errors
 Anomalous errors are not included in projection of errors.
 The projection of errors by the auditor is brought about by his assessment, for instance, his
test of control.
 Auditor will compare his projected errors with the tolerable error or materiality level set
up.
 What is the appropriate action of the auditor if the projected errors and anomalous errors
are approaching the materiality level? The auditor has to exercise the attitude of
professional skepticism by trying to think of other procedures to settle his doubts that it
could be possible that there may be misstatements that are not discovered. Had these
been discovered, it could exceed the materiality level.
 CHAPTER 12: COMPLETING THE AUDIT

 There are still procedures the auditor must perform before drawing his conclusion called
completing the audit procedures to ensure that he will form a correct opinion.

Procedures the Auditor Perform in Completing the Audit:

1. Identify and evaluate potential contingencies and commitments which may have an
effect on the financial statements.
 Example #1: client may be sued for damages. The auditor needs to have a level
of knowledge on what is the status of the case before drawing conclusion.
Auditor will inquire with the client’s legal counsel. If legal counsel says that it is
probable that the company will lose the case, the auditor must approach the
management and tell them that the contingency should be considered as a
liability or provision and not disclosure. The management will then make a
journal entry for the adjusting event.
 Journal Entry: Loss on Damages xxx
Provision for Damages xxx

 Adjusting Event – event that evidences a condition that is already present as of

the reporting period.
 Example #2: Purchase commitment. If the price at the reporting period is
significantly different from the price agreed upon, the management will make a
journal entry.
 Journal Entry: Loss on Purchase Commitment xxx
Estimated Liability on Purchase Commitment xxx

2. Perform subsequent events procedures.

 There may be events that happened after balance sheet date.
 For instance, after the balance sheet date but before the auditor hands in his
audit report, there was a fire and all inventories were burned down. It does not
require an adjusting entry. It is only a disclosure. The auditor can make a
supplemental audit report (if he does not want to modify his original audit
report) for that event, indicating that there was a fire and their inventories
were burned down.
3. Review the reasonableness of management’s assessment of the use of the going
concern assumption.
 In the absence to the contrary, we assume the company can still operate as a
going concern.
 Management should disclose in the notes to FS if there’s substantial evidence
that they can’t operate as a going concern.
 The auditor should not be laxed just because the management says that they
can’t operate as a going concern. Under PSA 700, the auditor has to dig in
 pieces of evidence to find out if the management’s assumption is reasonable or
not.
4. Identify related parties and perform procedures to test related party transactions.
 There may be transactions entered into and it is not properly accounted.
 Related parties are also required to be disclosed.
5. Obtain the management representation letter.
 Under what circumstance will the auditor obtain a representation letter? For
additional evidence. However, there are times when it is required, for example
the statement of management’s responsibility which is attached in the
financial statements.
 There are instances where the management will not give a representation
letter. If the reason is justifiable, auditor will think of alternative procedures. If
not justifiable, auditor will consider its impact in his audit report and also the
reliability of the evidence provided to him by the management.
6. Other procedures as may deemed necessary.
 Other audit procedures performed at the completion stage: p. 458
 CHAPTER 13: THE AUDITOR’S REPORT

 Audit Report – Final product of the audit process that communicates the auditor’s findings to
interested users. It expresses an opinion on the degree of correspondence between information
contained in the financial statements and the established criteria in the auditor’s procedures.
 Audit report is covered by PSA 700 “Forming an Opinion and Reporting on Financial Statements”.
 How did the auditor concluded the opinion he is about to render in the audit report? The auditor’s
basis on the type of opinion that he will render is the pieces of evidence obtained by him through
his performance of different audit procedures.

Reason why PSA 700 was amended:

 To provide greater transparency resulting to enhanced informational value,
enhanced communication between investor and auditor, increased management
attention, and increase auditor’s professional skepticism particularly on key audit
matters and the reasonableness of the use of the management’s going concern
assumption.

Changes in PSA 700:

 P. 541

Basic Sections of the Auditor’s Standard Report:

1. Title
2. Addressee
 If a corporation, it has to be addressed to the board of directors and/or
shareholders.
 If partnership, addressed to the partners and the firm.
 If unincorporated joint venture, the participants,
 If single proprietorship, the proprietor.
 If outside party, to the engaging party.
3. Auditor’s Opinion
 First portion is the opinion paragraph: “In our opinion, the accompanying
financial statements present fairly….”
4. Basis for Opinion
5. Going concern
 If there are substantial evidences obtained by the auditor that the entity
can no longer operate as going concern, he has to approach the
management, discuss the matter and ask them what their plans are.
 If there are plans to mitigate the effect of the going concern assumption, it
has to be disclosed in the notes to financial statements and disclosed to
the auditor’s report.
  If the company can still operate as going concern, this can be excluded.
6. Key Audit Matters (KAM)
 What is a key audit matter? Matters, in the auditor’s judgement, are of
most significant in the audit. It requires significant auditor’s attention when
performing the audit.
 If there are no KAM, indicate it in the audit report.
 Examples of KAM:
 Substantial doubt that the entity can no longer operate as a going
concern
 Client sold computer software along with training service and client
considered everything as a revenue. There is inappropriate
recognition of revenue because there is performance obligation to
settle the liability. (Under IFRS 15 Revenue and Contracts with
Customers)
 Three matters which the PSA requires the auditor to take into account
when making this determination:
1. Areas which were considered to be susceptible to higher risks of
material misstatement or which were deemed to be ‘significant risks’
2. Significant auditor judgements in relation to areas of the financial
statements that involved significant management judgement.
 Might include accounting estimates which have been identified
by the auditor as having a high degree of estimation
uncertainty.
3. Effect on the audit of significant events or transactions that have taken
place during the audit.
7. Responsibilities of Management and Those Charge with Governance for the
Financial Statements
8. Auditor’s Responsibilities for the Audit of the Financial Statements
9. Other Reporting Responsibilities
10. Name of the Engagement Partner
11. Signature of the Auditor
 Below the signature, indicate accreditation from BOA, BIR, etc., License
Number with Expiration Date, PTR Number (Professional Tax Receipt), TIN
Number, Dry Seal
12. Auditor’s Address
13. Date of the Auditor’s Report
 Types of Audit Opinion:
1. Unqualified Opinion – an unmodified opinion.
2. Qualified Opinion
 Under what circumstance will this be issued? If there are material
misstatements but are not pervasive. It does not affect the fairness of the
presentation of the financial statements as a whole.
 For instance, there has been a physical inspection of inventories but the
auditor is not present. The auditor will state that he is not present.
 Another instance, client has investment in equity securities or trading
securities, and auditor was not able to obtain sufficient appropriate evidence
about the reason or intention of the management for that type of investment.
3. Adverse Opinion
 Under what circumstance will this be issued? If there are substantial evidences
that there are material misstatements and the effect is pervasive.
 For instance, financial statements have to be consolidated if they have
subsidiary but is not consolidated. There is significant departure in the
accounting policy.
 Another instance, the company is a large entity but they used PFRS for SME.
 Another instance, if there’s substantial doubt that the company can no longer
operate as a going concern but management refuses to disclose the matter. It
affects the fairness of the presentation of the FS as a whole.
 Another instance, there is material investment and entity used fair value
method instead of equity method. There is significant departure in the
accounting policy.
4. Disclaimer of Opinion
 Under what circumstance will this be issued? If auditor failed to obtain
sufficient appropriate evidence because of restrictions imposed by the
management and these restrictions have caused the auditor’s inability to
obtain evidence and in the auditor’s judgement, it is considered as material.

Types of Modified Opinion:

1. Qualified Opinion
2. Adverse Opinion
3. Disclaimer of Opinion

 Type of opinion to be issued depends on the auditor’s evaluation of the evidences.

  Emphasis of Matter Paragraph
 To invite the attention of the users of the financial statement.
 Circumstances where emphasis of matter paragraph is necessary:
 When a financial reporting framework prescribed by law or regulation would
be unacceptable but for the fact that it is prescribed by law or regulation
 To alert users that the financial statements are prepared in accordance with a
special purpose framework
 When facts become known to the auditor after the date of the auditor’s report
and the auditor provides a new or amended auditor’s report
 Example of circumstances:
 The client was not able to operate during the audit period. The entity still
needs to file FS even if there’s no operation. The auditor wants to give
emphasis on the audit report that the client has no operation during this
period which is the subject of the audit.
 In the notes to FS, it is indicated that the client is being sued for damages and
as of the reporting period, the happening of the contingency is not yet
probable so it is not yet recorded as a provision.

 Other Matter Paragraph

 Under what circumstance will the auditor put other matter paragraph? If the auditor
considers it necessary to communicate a matter other than those that are presented or
disclosed in the financial statements.
 Example:
 The FS has been subject to an audit by another auditor in the prior period.

 What is the responsibility of the auditor regarding the opening balances and it is an initial audit
engagement? To ascertain the correctness of the opening balances by performing procedures.
 What if the auditor found out that there are misstatements in the prior year? What is his
responsibility? The auditor should communicate the misstatement with the appropriate level
of management and those charged with governance and request that the predecessor auditor
be performed.
 What if the predecessor auditor is not amendable to make the revisions of his report? The
successor auditor will disclose it in the notes to FS about his findings.

 Subsequent Events
 What if there are subsequent events after the issuance of the audit report but prior to issuance
of the financial statements and these could materially affect the fairness of presentation of the
 FS? What action will the auditor do? It is the initiative of the management to inform the
auditor of facts which may affect the financial statements during this period. The action of the
auditor depends if management will amend the financial statements or not.
If management amends the FS:
1. A new audit report is issued after performance of additional audit procedures.
2. The new report shall not be dated earlier than the date the amended financial
statements are signed or approved.

If management does not amend the FS:

1. The auditor should not release the original report anymore. Instead, issue a qualified
or adverse opinion and release the new report to the entity.
2. If the original report has been released to the entity, the auditor would notify the
persons ultimately responsible for the overall direction of the entity not to issue the FS
and the auditor’s report to third parties.
3. If FS have been subsequently released together with the original report, the auditor
needs to take action to prevent reliance on the auditor’s report. Example: Sending
notice to the public.

 What is the difference between adjusting and non-adjusting event? Adjusting events are events
that provide evidence to a condition that is already existing as of the reporting period. Non-
adjusting events are events that happened after the reporting period but it did not exist as of
the reporting period.
 Example: The entity is being sued for damages. They disclosed it in their notes to FS only since
the contingency is only possible. So as of December 31, there’s already a condition. Then after
December 31, there has been settlement. Therefore, this is an adjusting event.
 Example: After reporting period the warehouse burned down including all the inventories. This
is a non-adjusting event.
 If it is a non-adjusting event, the auditor needs to prepare a supplemental report stating
therein the circumstance related to the subsequent event.
 The date of the supplemental report is the date where the transaction happened.