AKLAN STATE UNIVERSITY

School of Management Sciences

Bachelor of Science in Accountancy
Banga, Aklan

PrE 4: AUDITING AND ASSURANCE: SPECIALIZED INDUSTRIES

AUDITING THEORY (PART 3)

COMPLETING THE AUDIT

The procedures to wrap-up an audit engagement are:

1. Review for related party transactions
2. Review for subsequent events
3. Make inquiries of a client’s legal counsel
4. Search for unrecorded liabilities
5. Perform final review stage analytical procedures
6. Review adequacy of disclosures using a disclosure checklist that list all specific disclosures
required by GAAP and the SEC, if appropriate
7. Review of working papers
8. Form an opinion

RELATED PARTY TRANSACTIONS

Identifying transactions with related parties
The following procedures may identify material transactions with known related parties or indicate the
existence of previously unknown related parties:
1. Provide personnel performing all segments of the audit with the names of known related
parties
2. Review the minutes of meetings of the board of directors and committees
3. Review filings with SEC and other regulatory agencies
4. Review conflict-of-interest statements obtained from the client’s management
5. Review business transacted with major customers, suppliers, borrowers, and lenders for
indications of undisclosed relationships
6. Consider whether unrecognized transactions are occurring, such as receiving or providing
accounting, management, or other services at no charge
7. Review accounting records for large, unusual, or nonrecurring transactions or balances,
especially those near the end of the period
8. Review invoices from law firms
9. Review confirmations of loan receivable and payable for guarantees.

Examining identified related party transaction

1. Obtain an understanding of the business purpose of the transaction
2. Examine invoices, executed copies of agreements, contracts, and other documents
3. Determine whether the transaction has been approved by the board of directors or other
officials
4. Test for reasonableness the compilation of amounts to be disclosed or considered for
disclosure
5. Arrange for the audits of intercompany balances to be performed as of concurrent dates, even
the fiscal years differ, and for the examination of the specified, important, and representative
related party transactions by the auditor for each of the parties with appropriate exchange of
relevant information
6. Inspect or confirm and obtain satisfaction concerning the transferability and value of the
collateral

EVENTS AFTER THE BALANCE SHEET DATE (subsequent events)

(Based on PSA 560 – subsequent events)
1. Events after the balance sheet date are those events, both favorable and unfavorable, that
occur between the balance sheet date and the date when the financial statements are
authorized for issue

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 2. The following procedures are typically performed at or near the completion of the fieldwork
to detect subsequent events:
a. Read the latest available interim financial statements and compare them with the
financial statements being reported on
b. Read the available minutes of the meetings of stockholders, directors, and appropriate
committees
c. Assemble pertinent findings resulting from inquiries of legal counsel and other
auditing procedures for litigation, claims, and assessments
d. Obtain a letter of representation from management
3. When the auditor becomes aware of events which materially affect the financial statements,
the auditor should consider whether such events are properly accounted for and adequately
disclosed in the financial statements

INQUIRIES OF CLIENT’S LEGAL COUNSEL

1. The auditor is required to communicate directly with a client’s attorney about liabilities
arising from litigations, claims, and assessments
2. A list of legal issues should be prepared by the client’s management, rather than the client’s
attorney. This information is sent by the auditor to the auditor to the attorney, requesting
information about:
a. Pending or threatened litigation, claims, and assessments
b. Unasserted claims and assessments
3. The client should request the attorney to furnish the following information for all pending or
threatened litigation, claims, and assessments, and to comment on differences between the
attorney’s and management’s views:
a. A description of the nature of the matter, progress to date, and action that client intends to
take
b. An evaluation of the likelihood of an unfavorable outcome and an estimate, if one can be
made, of the amount or range of potential loss
c. A statement that management’s list of pending or threatened claims is complete, or
identification of any omissions
4. The attorney’s refusal to reply to the audit inquiry is a SCOPE LIMITATION that may affect
the audit report
5. In the case of unasserted claims which the client has not disclosed, the lawyer is not required
to note them in his or her reply to the auditor. However, the lawyer is generally required to
inform the client of the omission and to consider withdrawing if the client fails to inform the
auditor

MANAGEMENT REPRESENTATION LETTER

(BASED ON PSA 560 – MANAGEMENT REPRESENTATIONS)
1. The representation letter
a. Confirms the oral representations given by management to the auditor and reduces
the possibility of misunderstanding between the client and the auditor
b. Reminds management of its primary responsibility for the financial statements
c. Addressed to the auditor
d. Dated as of the audit report date
e. Signed by the CEO and the CFO
f. Not a substitute for the application of other necessary auditing procedures
2. If management refuses to provide a representation that the auditor considers necessary, this
constitutes a scope limitation and the auditor should express a qualified opinion or a
disclaimer of opinion
3. Written representations requested from management may be limited to matters that are
considered either individually or collectively material to the financial statements

EVALUATION OF GOING CONCERN STATUS (BASED ON PSA 570 – GOING CONCERN)

1. The auditor should evaluate if the entity is going to continue as a going concern
2. The auditor should consider:
● The process followed
● Assumptions that are being based on
● Management’s plans for future action
3. When doubting events with regards to its “going concern assumption”, the auditor should:
● Review the plans of the management

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 ● Gather sufficient evidence that indicates a company will not be able to carry out the
business anymore, consider the effect of any plans and other mitigating factors
● Seek written representations from the management regarding its future plans
4. Events and conditions that may cast doubt about the going concern assumption:
FINANCIAL
● Net (current) liability position
● Fixed-term borrowings approaching maturity without realistic prospects of renewal or
repayment
● Financial debtors’ indications of withdrawal
● Negative operating cash lows
● Adverse key financial ratios
● Substantial operating loss or deterioration of assets
● Arrears of dividends
● Inability to pay creditors on time
● Inability to comply with loan terms and agreements
● Conversion of cash to credit when in delivery
● Inability to obtain financing for essential investments
OPERATING
● Loss of key management personnel without replacement
● Loss of major franchise, supplier etc.
● Labor and shortages of important supplies
OTHER
● Noncompliance with capital or other statutory requirements
● Pending legal or regulatory proceedings against the entity
● Changes in the legislation or government policy that may affect the entity

WRITING A MANAGEMENT LETTER

1. Reasons:
a. To encourage a better relationship between the auditor and the management
b. To suggest additional tax and management services that the auditor can provide
2. This letter is OPTIONAL and it helps the client operate its business effectively
3. There is no standard format for writing this letter.

INDEPENDENT AUDITOR’S REPORT

Maters that do not affect the auditor’s opinion

• You may add an emphasis of matter paragraph to the report to highlight a matter affecting the
financial statements which is included in the note of the financial statements that more
extensively discuss the matter
• The paragraph would preferably be included after the opinion paragraph but before the
section on any other reporting responsibilities, if any.
• Emphasis of matter paragraph is used to highlight the existence of:
• Material uncertainty relating to the event or condition that may cast significant doubt
on the entity’s ability to continue as a going concern; or
• Significant uncertainty (other than a going concern problem), the resolution of which
is dependent upon future events and which may affect the financial statements
• Emphasis of matter paragraph to report on matters other than those affecting the financial
statements. For example, if an amendment to other information in a document containing
audited financial statements is necessary and the entity refuses to make an amendment

Maters that affect the auditor’s opinion

• If the following circumstances exists that the auditor may not be able to conclude an
unqualified judgment and the effect of the matter is or may be material to the financial
statements:
• There is a limitation on the scope of the auditor’s work. – could lead to a qualified
opinion or a disclaimer of opinion
• A disagreement with the management regarding the acceptability of the accounting
policies selected the method of their application on the adequacy of financial
statement disclosures. Could lead to a qualified opinion or an adverse of opinion.
Qualified opinion

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 • Should be expressed when the auditor concludes that the unqualified opinion cannot be
expressed but that the effect of any disagreement with management, or limitation on scope is
not so material and pervasive as to require an adverse opinion or a disclaimer of opinion.
• A qualified opinion should be expressed as being “except for” the effects of the matter to
which the qualification relates.
Adverse opinion
• Should be expressed when the effect of the disagreement is so material and pervasive to the
financial statements that the auditor concludes that a qualification of the report is not
adequate to disclose the misleading or incomplete nature of the financial statements.
Disclaimer of Opinion
• Should be expressed when the possible effect of a limitation on the scope is so material and
pervasive that the auditor has not been able to obtain sufficient appropriate audit evidence
and accordingly is unable to express an opinion on the financial statements.

SUBSEQUENT EVENTS (BASED ON PSA 560)

1. The auditor should consider the effect of subsequent events on the financial statements and
on auditor’s report.

Events occurring up to the date of the auditor’s report

2. The auditor should perform procedures designed to obtain sufficient appropriate audit
evidence that all events up to date of the auditor’s report that may require adjustment of, or
disclosure in, the financial statements have been identified.
3. When the auditor becomes aware of events which materially affect the financial statements,
the auditor should consider whether such events are properly accounted for and adequately
disclosed in the financial statements.

Facts discovered after the date of the auditor’s report but before the financial statements are issued
4. During the period from the date of the auditor’s report to the date the financial statements are
issued:
● The responsibility to inform the auditor of facts which may affect the financial statements
rests with management
● When the auditor becomes aware of the facts that will materially affect the financial
statements, the auditor should:
o Consider whether the financial statements needed amendment
o Discuss the matter with the management
o Take the action appropriate in the circumstances
5. When the management amends the financial statements, the auditor would carry out the
procedures necessary in the circumstances and would provide management with a new report
on the amended financial statements
6. The new auditor’s report would be dated not earlier than the date the amended financial
statements are signed or approved and, accordingly, the procedures to identify subsequent
events would be extended to the date of the new auditor’s report
7. When management does not amend the financial statements but the auditor believes they
need to be amended and the auditor’s report has not been released to the entity, the auditor
should express a qualified opinion or an adverse opinion.

Facts discovered after the financial statements have been issued

8. After the financial statements have been issued, the auditor has no obligation to make any
inquiry regarding such financial statements.
9. When, after the financial statements have been issued, the auditor becomes aware of a fact
which existed at the date of the auditor’s report and which, if known at date, may have caused
the auditor to modify the auditor’s report, the auditor should:
● Consider whether the financial statements need revision
● Discuss the matter with management
● Take the appropriate action in the circumstances
10. When management revises the financial statements, the auditor would:
● Carry out the audit procedures necessary in the circumstances
● Review the steps taken by management to ensure that anyone in receipt of the previously
issued financial statements together with the auditor’s report thereon is informed of the
situation.
● Issue a new report on the revised financial statements:
o Include an emphasis of a matter paragraph.

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 o Would be dated earlier than the date the revised financial statements are
approved
o The auditor is permitted to restrict the audit procedures regarding the revised
financial statements to effects of the subsequent event that necessitated the
revision.
11. It may not be necessary to revise the financial statements and issue a new auditor’s report
when issue of the financial statements for the following period is imminent, provided
appropriate disclosures are to be made in such statements

USING THE WORK OF ANOTHER AUDITOR (BASED ON PSA 600)

1. The principal auditor is the auditor with responsibility for reporting on the financial
statements of an entity when those financial statements include financial information of one
or more components audited by another auditor
2. The auditor should consider whether the auditor’s own participation is sufficient to be able to
act as principal auditor. The following would be considered:
● The materiality of the portion of the financial statements which the principal auditor
audits
● The principal auditor’s degree of knowledge regarding the business of the components
● The risk of material misstatements in the financial statements of the components audited
by the other auditor
● The performance of additional procedures as set out in PSA 600 regarding the
components audited by other auditor resulting in the principal auditor having significant
participation in such audit
3. When planning to use the work of another auditor, the principal auditor should:
● Consider the professional competence of the other auditor in the context of specific
assignment
● Perform procedures to obtain sufficient appropriate audit evidence that the work of the
other auditor is adequate for the principal auditor’s purposes in the context of the specific
assignment
● Consider the significant findings of the other auditor
4. Reporting conclusions
● When the principal auditor concludes that the work of the other cannot be used and the
principal auditor has not been able to perform sufficient additional procedures regarding
financial information of the component audited by the other auditor, the principal auditor
should express a qualified or a disclaimer of opinion because of a scope of limitation.
● If the auditor issues or intend to issue, a modified auditor’s report, the principal auditor
would consider whether the subject of modification is of such a nature and significance,
in relation to the financial statements of the entity on which the principal auditor is
reporting that a modification on the principal auditor’s report is required.
5. Division of responsibility
● When the principal auditor bases the audit opinion on the financial statements taken as a
whole solely upon the report of another auditor regarding the audit of one or more
components, the principal auditor’s report should state this fact clearly and should
indicate the magnitude of the portion of the financial statements audited by the other
auditor.

COMPARATIVES (BASED ON PSA 710)

1. Two broad financial reporting frameworks for comparatives:

CORRESPONDING FIGURES
● For the prior periods, these are an integral part of the current period financial statements
and have to be read in conjunction with the amounts and other disclosures relating to the
current period.
● These are not presented as complete financial statements capable of standing alone
● The auditor should obtain sufficient appropriate audit evidence that the corresponding
figures meet the requirements of GAAP in the Philippine
● The auditor should assess whether:
o Accounting policies used for the corresponding figures are consistent with those
of the current period or whether appropriate adjustments and/or disclosures have
been made

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 o Corresponding figures agree with the amounts and other disclosures presented in
prior period or whether appropriate adjustments and/or disclosures have been
made

COMPARATIVE FINANCIAL STATEMENTS

• These comparative financial statements for the prior period(s) are considered separate
financial statements.
• These are presented for comparison with the financial statements of the current
period, but do not form part of the current period financial statements
• The auditor should obtain sufficient appropriate evidence that the comparative
financial statements meet the requirements of GAAP in the Philippines
• The auditor should assess whether:
o Accounting policies of the prior period are consistent with those of the current
period or whether appropriate adjustments and/or disclosures have been made
o Prior period figures presented agree with the amounts and other disclosures
presented in the prior period or whether appropriate judgments and disclosures
have been made

REPORTING – CORRESPONDING FIGURES

1. The comparatives are not specifically identified in the audit report because the auditor’s
opinion is on the current period financial statements as a whole, including the corresponding
figures
2. When the auditor’s report on the prior period, as previously issued, included an opinion other
than unqualified and the matter which gave rise to the modification is:
a. Unresolved, and results in modification of the auditor’s report regarding the current
figures period, the auditor’s report should also be modified regarding the corresponding
figures
b. Unresolved, but does not result in a modification of the auditor’s report regarding the
current period figures, the auditor’s report should also be modified regarding the
corresponding figures
c. Resolved, and properly dealt with in the financial statements, the current period report
does not ordinarily refer to the previous modification. However, if the matter is material
to the current period, the auditor may include an emphasis of the matter paragraph
dealing with the situation
3. When the incoming auditor decides to refer to the predecessor auditor’s report, the incoming
auditor’s report should indicate:
a. That the financial statements of the prior period were audited by another auditor
b. Type of report issued by the predecessor auditor and, if the report was modified, the
reasons therefore;
c. Date of that report
4. When the prior period financial statements were not audited, the incoming auditor should
state that the corresponding figures are unaudited.
5. If the incoming auditor identifies that the corresponding figures are materially misstated, the
auditor should request management to revise the corresponding figures or if management
refuses to do so, appropriately modify the report.

REPORTING – COMPARATIVE FINANCIAL STATEMENTS CONTINUING AUDITOR

1. The auditor may express adverse or qualified opinion, disclaim an opinion, or include an
emphasis of paragraph with respect to one or more financial statements for one or more
period, while issuing a different report on the other financial statements
2. When finding the connectivity of the prior period financial statements with the current
financial statements, if the opinion on such prior period is different from the opinion
previously expressed, the auditor should disclose the substantive reasons for the different
opinion in an emphasis of matter paragraph

INCOMING AUDITOR
When the financial statements of the prior period were audited by another auditor,
• The predecessor auditor may reissue the audit report on the prior period with the
incoming auditor only reporting on the current period; or
• The incoming auditor’s report should state that the prior period was audited by
another auditor and the incoming auditor’s report should indicate:
o That the financial statements of the prior period were audited by another auditor

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 o The type of report issued by the predecessor auditor, and if the report was
modified, the reasons; therefore
o Date of the report

PRIOR PERIOD FINANCIAL STATEMENTS NOT AUDITED

1. When the prior financial statements were not audited, the incoming auditor should state in the
auditor’s report that the comprehensive financial statements are unaudited
2. If the prior period financial statements were materially misstated, the auditor should request
management to revise the prior year’s figures or if management refuses to do so,
appropriately modify the report

OTHER INFORMATION IN DOCUMENTS CONTAINING AUDITED FINANCIAL

STATEMENTS (BASED ON PSA 720)

An entity ordinarily issues on an annual basis a document which includes its audited financial statements
together with the auditor’s report thereon, also called “annual report”.

Material inconsistencies
1. This exists when the other information contradicts information contained in the audited
financial statements
2. If, on reading the other information, the auditor identifies material inconsistency, the auditor
should determine whether the financial statements need to be amended
• If the amendment is necessary and the entity refuses to make an amendment, the
auditor should express a qualified or adverse opinion
• If the amendment is necessary and the entity refuses to make an amendment, the
auditor should consider including in the auditor auditor’s report an emphasis of
matter paragraph.

Material misstatements of facts

3. A Material misstatement of fact in other information exists when such information, not
related to matters appearing in the audited financial statements, is incorrectly stated or
presented
4. If the auditor becomes aware that there is a misstatement of fact, the auditor should discuss
the matter with the entity’s management
5. When the auditor still considers there is an apparent misstatement of fact in the other
information which management refuses to correct, the auditor should consider taking
appropriate action such as notifying those persons ultimately responsible for the overall
direction of the entity in writing of the auditor’s concern regarding the other information and
obtaining legal advice

THE AUDITOR’S REPORT ON SPECIAL PURPOSE AUDOT ENGAGEMENTS (BASED ON

PSA 800)
1. Special purpose audit engagements include:
a. Financial statements prepared in accordance with a comprehensive basis of accounting
other than GAAP in the Philippines
b. Specified accounts, elements of accounts, or terms in a financial statement
c. Compliance with contractual agreements
d. Summarized financial statements
2. The auditor should assess and review the conclusions drawn from the audit evidenced obtained
during the special purpose audit engagement as the basis for an expression of opinion. The report
should contain a clear written expression of opinion
3. Before undertaking a special purpose audit engagement, the auditor should ensure there is
agreement with the client as to the exact nature of the engagement and the form and content of the
report to be issued
4. The auditor’s report on a special purpose audit engagement, except for a report on summarized
financial statements, should include the following basic elements, ordinarily in the following
layout:
● Title
● Addressee
● Opening or introductory paragraph
● Identification of the financial information audited

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 ● A statement of the responsibility of the entity’s management and the responsibility of the
auditor
● A scope paragraphs
● Reference to the PSAs applicable to special purpose audit engagements
● Description of the work the auditor performed
● Opinion paragraph containing an expression of opinion on the financial information
● Date of the report
● Auditor’s address
● Auditor’s signature

Reports on an “other comprehensive basis of accounting” financial statements

1. The report should include a statement that indicates the basis of accounting used or should
refer to the note to the financial statements giving that information
2. The opinion should state whether the financial statements are prepared, in all material
aspects, in accordance with the identified basis of accounting
3. If the financial statements are not suitably titled or the basis of accounting is not adequately
disclosed, the auditor should issue an appropriately modified report

Reports on a component financial statement

1. This type of engagement may be undertaken as a separate engagement or in conjunction with
an audit of the entity’s financial statements
2. The auditor’s report on a component of financial statements should include a statement that
indicates the basis accounting in accordance with which the component is presented or refers
to an agreement that specifies the basis. The opinion should state whether the component is
prepared, in all material aspects, in accordance with the identified basis of accounting.
3. When an adverse opinion or disclaimer of opinion on the entire financial statements has been
expressed, the auditor should report components of the financial statements only if those
components are not so extensive as to constitute a major portion of the financial statements.
To do otherwise may overshadow the report on the entire financial statements.

Reports on a compliance with contractual agreements

1. Engagements to express an opinion as to an entity’s compliance with contractual agreements
should be undertaken only when the overall aspects of compliance relate to accounting and
financial matters within the scope of the auditor’s professional competence
2. The report should state whether, in the auditor’s opinion, the entity has complied with the
particular provisions of the agreement

Reports on summarized financial statements

1. Unless the auditor has expressed an audit opinion on the financial statements from which the
summarized financial statements are derived, the auditor should not report the summarized
financial statements
2. Summarized financial statements should be appropriately titled to identify the audited
financial statements from which they have been derived.
3. Summarized financial statements do not contain all the information required by the financial
reporting framework used for annual audited financial statements. Consequently, wording
such as “present fairly, in all material respects,” is not used
4. The following elements in an auditor’s report:
a. Title
b. Addressee
c. An identification of the audited financial statements from the summarized financial
statements were derived
d. A reference to the date of the audit report on the unabridged financial statement and the
type of opinion given in that report
e. An opinion as to whether the information in the summarized financial statements is
consistent with the audited financial statements from which it is derived
f. A statement, or reference to the note within the summarized financial statements, which
indicates that for a better understanding of an entity’s financial performance and position
and of the scope of the audit performed, the summarized financial statements should be
read n conjunction with the unabridged financial statements and the audit report thereon
g. Date of the report
h. Auditor’s address
i. Auditor’s signature

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REPORTS – OTHER ASSURANCE AND RELATED SERVICES ENGAGEMENTS TO
REVIEW FINANCIAL STATEMENTS
(Based on PSRE 2400)

1. The objective of a review of financial statements is to enable an auditor to state whether, on

the basis of procedures which do not provide all the evidence that would be required in an
audit, anything has come to the auditor’s attention that causes the auditor to believe that the
financial statements are not prepared, in all material respects, in accordance with Philippine
Financial Reporting Standards (negative assurance).

2. For the purpose of expressing negative assurance in the review report, the auditor should
obtain sufficient appropriate audit evidence primarily through inquiry and analytical
procedures to be able to draw conclusions.

3. A review engagement provides a moderate level of assurance that the information subject to
review is free of material misstatement. This is expressed in the form of negative assurance.

4. In planning a review of financial statements, the auditor should obtain or update the
knowledge of the business including consideration of the entity’s organization, accounting
systems, operating characteristics and the nature of its assets, liabilities, revenues, and
expenses.

5. Procedures for the review of financial statements will ordinarily include:

● Obtaining an understanding of the entity’s business and the industry in which I operate.
● Inquiries concerning the entity’s
o Accounting principles and practices.
o Procedures for recording, classifying, and summarizing transactions, and accumulating
information for disclosures.
o Actions taken at meeting of stockholders, the board of directors, and committees.
● Analytical procedures designed to identify relationships and individual items that appear
unusual. Examples:
o Comparison of the financial statements with those from prior periods.
o Comparison of the statements with anticipated results, such as previously prepared
budgets or forecasts.
o Study of the relationships of elements of the financial statements that are expected to
form a predictable pattern.
● Reading the financial statements to consider, on the basis of information coming to the
auditor’s attention, whether the financial statements appear to conform to basis of
accounting indicated.
● Obtaining reports from another auditor’s, if any if considered necessary, who have been
engaged to audit or review the financial statements of components of the entity.
● Inquiries of persons having responsibility for financial and accounting matters
concerning, for example:
o Whether all transactions have been recorded.
o Whether the financial statements have been prepared in accordance with the basis of
accounting indicated.
o Changes in the entity’s business activities and accounting principles and practices.
o Matters as to which questions have arisen in the course of applying the foregoing
procedures.
o Obtaining written representations from managements when considered appropriate.

6. If the auditor has reason to believe that the information subject to review may be materially
misstated, the auditor should carry out additional or more extensive procedures as are
necessary to be able to express negative assurance or to confirm that a modified report is
required.

ENGAGEMENTS TO PERFORM AGRRED-UPON PROCEDURES REGARDING FINANCIAL

INFORMATION (Based on PSRS 4400)

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 1. An engagement to perform agreed-upon procedures may involve the auditor in performing
certain procedures concerning:
o Individual items of financial data (for example, accounts payable, accounts receivable,
purchases from related parties and sales and profits of a segment of an entity).
o A financial statement (for example, a balance sheet).
o A complete set of financial statements.
2. The objective of an agreed-upon procedures engagement is for the auditor to carry out
procedures of an audit nature to which the auditor and the entity and any appropriate third
parties have agreed and to report on factual findings.
3. As the auditor simply provides a report of the factual findings of agreed-upon procedures, no
assurance is expressed. Users of the report assess for themselves the procedures and findings
reported by the auditor and draw their own conclusions from the auditor’s work.
4. The report is restricted to those parties that have agreed to procedures to be performed since
others, unaware of the reasons for the procedures, may misinterpret the results.
5. Independence is not a requirement for an agreed-upon procedures engagement.

REPORTING

6. The report on an agreed-upon procedures engagement needs to describe the purpose and the
agreed-upon procedures of the engagement in sufficient detail to enable the reader to
understand the nature and the extent of the work performed.

7. The report of factual findings should contain:

• Title;
• Addressee (ordinarily the client who engaged the auditor to perform the agreed-upon
procedures);
• Identification of specific financial or non-financial information to which the agreed-
upon procedures have been applied;
• A statement that the procedures performed was those agreed upon with the recipient;
• A statement that the engagement was performed in accordance with the Philippine
Standard on Related Services applicable to agree upon procedures engagements;
• A statement that the auditor is not independent of the entity if such is the case;
• Identification of the purpose for which the agreed-upon procedures were performed;
• A listing of the specific procedures performed;
• A description of the auditor’s factual findings including sufficient details of errors
and exceptions found;
• A statement that the procedures performed does not constitute either an audit or a
review and, as such, no assurance is expressed;
• A statement that had the auditor performed additional procedures, an audit or a
review, other matters might have come to light that would have been reported;
• A statement that the report is restricted to those parties that have agreed to the
procedures to be performed;
• A statement (when applicable) that report relates only to the elements, accounts,
items, or financial and non-financial information specified and that it does not extend
to the entity’s financial statements taken as a whole;
• Date of the report;
• Auditor’s address; and
• Auditor’s signature.

ENGAGEMENTS TO COMPLETE FINANCIAL INFORMATION (Based on PSRS 4410)

1. A compilation engagement would ordinarily include the preparation of financial statements

(which may or may not be a complete set of financial statements) but may also include the
collection, classification, and summarization o other financial information.
2. The objective of a compilation engagement is for the accountant to use accounting expertise,
as opposed to auditing expertise, to collect, classify and summarize financial information.
3. The procedures employed are not designed and do not enable the accountant to express any
assurance on the financial information.
4. Independence is not a requirement for a compilation engagement. However, where the
accountant is not independent, a statement to that effect would be made in the accountant’s
report.

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 5. The accountant should obtain a general knowledge of the business and operations of the
entity and should be familiar with the accounting principles and practices of the industry in
which the entity operates and with the form and content of the financial information that is
appropriate in the circumstances.
6. The accountant is not ordinarily required to:
● Make any inquiries of management to assess the reliability and completeness of the
information provided;
● Assess internal controls;
● Verify any matters;
● Verify any explanations.
If the accountant becomes aware that information supplied by management is incorrect,
incomplete, or otherwise unsatisfactory, the accountant should consider performing the above
procedures and request management to provide additional information.

If management refuses to provide additional information, the accountant should withdraw

from the engagement, informing the entity of the reasons for the withdrawal.

7. The accountant should read the compiled information and consider whether it appears to be
appropriate in form and free from obvious material misstatements.
8. The accountant should obtain an acknowledgement from management of its responsibility for
the appropriate presentation of the financial information and of its approval of the financial
information.
9. The financial information compiled by the accountant should contain a reference such as
“Unaudited’, “Compiled without Audit or Review,’ or “Refer to the Compilation report’ on
each page of the financial information or on the front of the complete set of financial
statements.

THE EXAMINATION OF PROSPECTIVE FINANCIAL INFORMATION

(Based on PSAE 3400)

1. “PROSPECTIVE FINANCIAL INFORMATION” means financial information based on

assumptions about events that may occur in the future and possible actions by an entity. It can
be in the form of a forecast, a projection, or a combination of both, for example, a one-year
forecast plus a five-year projection.

2. A “FORECAST” means prospective financial information prepared on the basis of

assumptions as to future events which management expects to take place and the actions
management expects to take as of the date the information is prepared (best-estimate
assumptions).

3. A “PROJECTION” means prospective financial information prepared on the basis of:

● Hypothetical assumptions about future events and management actions which are not
necessarily expected to take place, such as when some entities are in a start-up phase or
are considering a major change in the nature of operations; or
● A mixture of best-estimate and hypothetical assumptions.

4. Prospective financial information can include financial statement or one or more elements of
financial statements and may be prepared:
● As an internal management tool, for example, to assist in evaluating a possible capital
investment; or
● For distribution to third parties.

5. Management is responsible for the preparation and presentation of the prospective financial
information, including the identification and disclosure of the assumptions on which it is
based.

6. In an engagement to examine prospective financial information, the auditor should obtain

sufficient appropriate evidence as to whether:

● Management’s best-estimate assumptions on which the prospective financial information

is based are not unreasonable and, in the case of hypothetical assumptions, such
assumptions are consistent with the purpose of the information.

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 ● The prospective financial information is properly presented and all material assumptions
are adequately disclosed, including a clear indication as to whether they are best-estimate
assumptions or hypothetical assumptions; and
● The prospective financial information is prepared on a consistent basis with historical
financial statements, using appropriate accounting principles.

7. The auditor should not express any opinion as to whether the results shown in the prospective
financial information will be achieved.

8. When reporting on the reasonableness of management’s assumptions, the auditor provides

only a moderate level of assurance.

9. The auditor should not accept, or should withdraw from, an engagement when the
assumptions are clearly unrealistic or when the auditor believes that the prospective financial
information will be inappropriate for its intended use.

10. The auditor should obtain written representations from management regarding the intended
use of the prospective financial information, the completeness of significant management
assumptions and management’s acceptance of its responsibility for the prospective financial
information.

CODE OF PROFESSIONAL ETHICS FOR CPAs

Code of Ethics for Professional Accountants in the Philippines

• is based on the International Code of Ethics for professional accountants developed

by the International Federation of Accountants.
• Is mandatory for all CPAs and is applicable to professional services performed in the
Philippines on or after January 1, 2004.
• Is divided into three parts:
Part A - applies to all professional accountants unless otherwise specified
Part B - applies only to those professional accountants in public practice
Part C - applies to employed professional accountants, and may also apply, in appropriate
circumstances, to accountants employed in public practice

CPAs should observe the following FUNDAMENTAL PRINCIPLES:

1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional behavior
6. Technical standards

RULES APPLICABLE TO ALL PROFESSIONAL ACCOUNTANTS

1. INTEGRITY AND OBJECTIVITY
a. Integrity implies not merely honesty but fair dealing and truthfulness. The principle of
objectivity imposes the obligation on all professional accountants to be fair, intellectually
honest, and free of conflicts of interest.
b. Professional accountants should neither accept nor offer gits or entertainment which
might reasonably be believed to have a significant and improper influence on their
professional judgment or those with whom they deal.

2. PROFESSIONAL COMPETENCE may be divided into two separate phases

a. Attainment of professional competence- requires initially a high standard of general
education followed by specific education, training, and examination in professionally
relevant subjects and a period of work experience.
b. Maintenance of professional competence– requires a continuing awareness of
development in the accountancy profession including relevant national and
international pronouncements on accounting, auditing, and other relevant regulations
and statutory requirements

3. CONFIDENTIALITY

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 a. Professional accountants have an obligation to respect the confidentiality of
information about a client’s or employer’s affairs acquired in the course of
professional services.
b. The duty of confidentiality continues even after the end of the relationship between
the professional accountant and the client or employer.

4. TAX PRACTICE
a. The professional accountant should ensure that the client or the employer are aware
of the limitations attaching to tax advice and services so that they do not misinterpret
an expression of opinion as an assertion of fact.
b. A professional accountant should not be associated with any return or communication
in which there is reason to believe that it:
o Contains a false or misleading statement;
o Contains statements or information furnished recklessly or without any real
knowledge of whether they are true or false; or
o Omits or obscure information required to be submitted and such omission or
obscurity would mislead the revenue authorities.
c. When a professional accountant learns of a material error or omission in a tax return
of a prior year, or the failure to file a required tax return, he/she has a responsibility
to:
1. Promptly advise the client or employer of the error or omission and recommend that
disclosure be made to the revenue authorities.
2. If the client or employer does not correct the error, he/she:
a. Should inform the client or the employer that it is possible to act for them in
connection with that return or other related information submitted to the
authorities; and
b. Should consider whether continued association with the client or employer
in any capacity is consistent with professional responsibilities.

5. CROSS BORDER ACTIVITIES

When a professional accountant performs services in a country other than the home country and
differences on specific matters exist between ethical requirements of the two countries, the following
provisions should be applied:
1. When the ethical requirements of the country in which the services are being performed are
LESS STRICT than the Philippine Code of Ethics, then our code should be applied.
2. When the ethical requirements of the country in which the services are being performed are
STRICTER than our code, then the ethical requirements in the country where services are
being performed should be applied.
3. When the ethical requirements of the Philippines are mandatory for services performed
outside the Philippines and are stricter than that set out in (1) and (2) above, then the ethical
requirements of the Philippines should be applied.

6. PUBLICITY

In the marketing and promotion of themselves and their work, professional accountants should:
a. Not use means which brings the profession into disrepute.
b. Not make exaggerated claims for the services they are able to offer, the qualifications they
possess, or experience they have gained; and
c. Not denigrate the work of other accountants.

RULES APPLICABLE TO PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE

INDEPENDENCE
a. Independence requires:
1. Independence of mind – The state of mind that permits the provision of an opinion without
being affected by influences that compromise professional judgment, allowing an individual
to act with integrity, and exercise objectivity and professional skepticism.
2. Independence in appearance – The avoidance of facts and circumstances that are so
significant that a reasonable and informed third party, having knowledge of all relevant
information, including safeguards applied, would reasonably conclude a firms, or a member
of the assurance team’s integrity, objectivity or professional skepticism had been
compromised.

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b. Members of assurance teams, firms, and network firms should identify THREATS to
independence, evaluate the significance of those threats, and, if the threats are other than clearly
insignificant, identify and apply SAFEGUARDS to eliminate the threats or reduce them to acceptable
level, such that independence of mind and independence in appearance are not compromised. In situations
when no safeguards are available to reduce the threat to an acceptable level. The only possible actions are
to:
1. Eliminate the activities or interest creating the threat; or
2. Refuse to accept or continue the assurance engagement.

INDEPENDENCE REQUIREMENTS IN ASSURANCE ENGAGEMENTS

a. For assurance engagements provided to an audit client, the member of the assurance team, the
firm and network firms are required to be independent of the client
b. For assurance engagements provided to clients that are not audit clients, when the report is
not expressly restricted for use by identified users, the members of the assurance team and
firm are required to be independent of the client
c. For assurance engagements provided to clients that are not audit clients, when the assurance
report is expressly restricted for use by identified users, the members of the assurance team
are required to be independent of the client. In addition, the firm should not have a material
direct or indirect financial interest in the client

Network firm – an entity under common control, ownership or management with the firm or any entity
that a reasonable and informed third party having knowledge of all relevant information would reasonably
conclude as being part of the firm nationally or internationally

Financial interest – an interest in equity or other security, debenture, loan or other debt instrument of an
entity including rights and obligations to acquire such an interest and derivatives directly related to such
interest

Direct financial interest – a financial interest:

1. Owned directly by and under the control of an individual or entity; or

2. Beneficially owned through a collective investment vehicle, estate, trust or other intermediary
over which the individual or entity has control
Indirect financial interest – a financial interest beneficially owned through a collective investment
vehicle, estate, trust or other intermediary over which the individual or entity has no control
THREATS TO INDEPENDENCE
1. SELF-INTEREST THREAT
Occurs when a firm or a member of the assurance team could benefit from a financial interest in, or other
self-interest conflict with, an assurance client. Examples:
a. A direct financial interest or material indirect financial interest in an assurance client
b. A loan or guarantee to or from an assurance client or any of its directors or officers
c. Undue dependence on total fees from an assurance client
d. Concern about the possibility of losing the engagement
e. Having a close business relationship with an assurance client
f. Potential employment with an assurance client
g. Contingent fees relating to assurance engagements

2. SELF-REVIEWTHREAT
Occurs when:
a. Any product or judgment of a previous assurance engagement or non-assurance engagement
needs to be reevaluated in reaching conclusions on the assurance engagement or;
b. When a member of the assurance team was previously a director or officer of the assurance
client, or was an employee in a position to exert direct and significant influence over the
subject matter of the assurance engagement

3. ADVOCACY THREAT
Occurs when a firm, or a member of the assurance team, promotes, or may be perceived to promote, an
assurance client’s position or opinion to the point that objectivity may, or may be perceived to be
compromised

4. FAMILIARITY THREAT

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Occurs when, by virtue of a close relationship with an assurance client, its directors, officers or
employees, a firm or a member of the assurance team becomes too sympathetic to the client’s interests.

5. INTIMIDATION THREAT
Occurs when a member of the assurance team may be deterred from acting objectively and exercising
professional skepticism by threats, actual or perceived, from the directors, officers or employees of an
assurance client

CATEGORIES OF SAFEGUARDS
1. Safeguards created by the profession, legislation or regulation
2. Safeguards within the assurance client
3. Safeguards within the firm’s own systems and procedures

Safeguards created by the profession, legislation or regulation include:

a. Educational, training and experience requirements for entry into the profession
b. Continuing education requirements
c. Professional standards and monitoring and disciplinary processes
d. External review of a firm’s quality control systems; and
e. Legislation governing the independence requirements of the firm

Safeguards within the assurance client include the following:

a. When the assurance client’s management appoints the firm, persons other than management
ratify or approve the appointment
b. The assurance client has competent employees to make managerial decisions
c. Policies and procedures that emphasize the assurance client’s commitment to fair financial
reporting
d. Internal procedures that ensure objective choices in commissioning non-assurance
engagements; and
e. A corporate governance structure, such as an audit committee, that provides appropriate
oversight and communications regarding a firm’s services

Safeguards within the firm’s own systems and procedures may include FIRMWIDE safeguards
such as the following:
a. Firm leadership that stresses the importance of independence and the expectation that
members of assurance teams will act in the public interest
b. Policies and procedures to implement and monitor quality control of assurance engagements
c. Documented independence policies
d. Internal policies and procedures to monitor compliance with firm policies and procedures as
they relate to independence
e. Policies and procedures that will enable the identification of interests or relationships
between the firm or members of the assurance team and assurance client
f. Policies and procedures to monitor and, if necessary, mange the reliance on revenue received
from a single assurance client
g. Using different partners and teams with separate reporting lines for the provision of non-
assurance service to an assurance client
h. Policies and procedures to prohibit individuals who are not members of the assurance team
from influencing the outcome of the assurance engagement
i. Timely communication of a firm’s policies and procedures, and any changes thereto, to all
partners and professional staff, including appropriate training and education thereon
j. Designating a member of senior management as responsible for overseeing the adequate
functioning of the safeguarding system
k. Means of advising partners and professional staff of those assurance clients and related
entities from which they must be independent
l. A disciplinary mechanism to promote compliance with policies and procedures; and
m. Policies and procedures to empower staff to communicate to senior levels within the firm any
issue of independence and objectivity that concerns them; this includes informing staff of the
procedures open to them
Safeguards within the irm’s own systems and procedures may include ENGAGEMENT SPECIFIC
safeguards such as the following:
a. Involving an additional professional accountant to review the work done or otherwise advise as
necessary. This individual could be someone from outside the irm or network irm, or someone with
the irm or network irm who was not otherwise associated with the assurance team

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b. Consulting a third party, such as a committee of independent directors, a professional regulatory
body or another professional accountant
c. Rotation of senior personnel
d. Discussing independence issues with the audit committee or others charged with governance,
e. Disclosing to audit committee, or others charged with governance, the nature of services provided
and extent of fees charged
f. Policies and procedures to ensure members of the assurance team do not make, or assume
responsibility for, management decisions for the assurance client
g. Involving another irm to perform or re-perform part of the assurance engagement
h. Involving another irm to re-perform the non-assurance service to the extent necessary to enable to
take responsibility for that service; and
i. Removing an individual from the assurance team, when that individual’s financial interest or
relationships create a threat to independence

ENGAGEMENT PERIOD
1. The members of the assurance team and the firm should be independent of the assurance
client during the period of the assurance engagement
2. The period of the engagement is expected to recur, the period of the assurance services
and ends when the assurance report is issued, except when the assurance engagements is
of a recurring nature
3. If the assurance engagement s expected to recur, the period of the assurance engagement
ends with the notification by either party that the professional relationship has terminated
or the issuance of the final assurance report, whichever is later.
4. In the case of an audit engagement, the engagement period includes the period covered
by the financial statements reported on by the firm
5. When an entity becomes an audit client during or after the period covered by the financial
statements that the firm will report on, the firm should consider whether any threats to
independence may be created by:
i. Financial or business relationships with the audit client during or after the period
covered by the financial statements, but prior to the acceptance of the audit
engagement; or
ii. Previous services provided to the audit client

Similarly, in the case of an assurance engagement that is not an audit engagement, the
firm should consider whether any financial or business relationships or previous services
may create threats to independence.

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