AUD PROB REVIEWER

FINANCIAL STATEMENT PREPARATION

1. Income Statement or Statement of Financial Performance

2. Statement of Changes in Equity
3. Balance Sheet or Statement of Financial Position
4. Statement of Cash Flows
5. Notes to the Financial Statements

Closing entries, also called closing journal entries, are

entries made at the end of an accounting period to zero out
all temporary accounts and transfer their balances to
permanent accounts. In other words, the temporary
accounts are closed or reset at the end of the year.

A Post-Closing Trial Balance is prepared after the recording

and posting of the closing entries. The remaining
Permanent/Real accounts of assets, liabilities and equity
are presented with their balances. This provides the
starting balances for the next accounting period. ACCRUALS AND DEFERRALS

CORRECTING AND ADJUSTING ENTRY

Adjusting entries can be divided into five categories:
(1) Deferred (Prepaid) Expenses
Deferred (Prepaid) Expenses - includes miscellaneous assets
that are paid for in advance and then expire or get used up in
the near future. Debit an expense account and credit the
prepaid asset account. (Examples include Rent, Insurance, and
Supplies)
Adjusting Journal entry:
Asset Expense $xxx
Prepaid Asset $xxx
- the value of the asset that was used up

(2) Depreciation of assets

Depreciation of Plant Assets - the allocation of a plant asset's
cost to an expense account as it is
used over its useful life. Debit an expense account and credit a to provide a product or service to the customer. Debit a liability
contra-asset account. account and credit a revenue account.
Adjusting Journal Entry:
Adjusting Journal entry:
Unearned Revenue $xxx
Depreciation Expense, $xxx
Revenue $xxx
Accumulated Depreciation, $xxx
- For the value of products/services provided
(3) Accrued Expenses
Accrued Expenses - Expenses that a business incurs before
AUDIT PROCESS
they pay them Debit an expense account and credit a liability
account (Examples include Wages and Interest)
What is an audit?
Adjusting Journal Entry:
- systematic process of
Expense $xxx
Payable $xxx objectively obtaining and
- For the amount owed
evaluating evidence
(4) Accrued Revenues regarding assertions about
Accrued Revenues - revenues that a business has earned but
has not yet received payment for. Debit an asset account and
economic actions and
credit a revenue account. (Examples include Interest)
Adjusting Journal Entry:
events to ascertain the
Receivable $xxx degree of correspondence
Revenue $xxx
(5) Deferred (Unearned) Revenues
between these
Deferred (Unearned) Revenues - cash collected from customers
before work is done by the business. The business has a liability
assertions and established communicating the results
criteria and thereof
communicating the results Audit Process
thereo - The sequence of different
What is an audit? activities (or ‘steps’,
- systematic process of ‘phases’) involved in an
objectively obtaining and audit.
evaluating evidence Pre-engagement
regarding assertions about This phase will require a
economic actions and decision from the auditor to
events to ascertain the accept a new client or
degree of correspondence continue the relationship
between these with an
assertions and established
criteria and
existing one. This process
would require an evaluation
of
the auditor’s qualification
and the integrity and
auditability of the client’s
financial statements.
Primary objective: To
minimize the likelihood of
being
associated with a client
whose management lacks
integrity
Acceptance of an
Engagement
In making a decision
whether to accept or reject
an
engagement, an
What is an audit?
- systematic process of
objectively obtaining and
evaluating evidence
regarding assertions about
economic actions and
events to ascertain the
degree of correspondence
between these
assertions and established
criteria and
communicating the results
thereof
Audit Process
- The sequence of different
activities (or ‘steps’,
‘phases’) involved in an
audit.
Pre-engagement
This phase will require a
decision from the auditor to
accept a new client or
continue the relationship
with an
existing one. This process
would require an evaluation
of
the auditor’s qualification
and the integrity and
auditability of the client’s
financial statements.
Primary objective: To
minimize the likelihood of
being
associated with a client
whose management lacks
integrity
Acceptance of an
Engagement
In making a decision
whether to accept or reject
an
engagement, an
What is an audit?
- systematic process of
objectively obtaining and
evaluating evidence
regarding assertions about
economic actions and
events to ascertain the
degree of correspondence
between these
assertions and established
criteria and
communicating the results
thereof
Audit Process
- The sequence of different
activities (or ‘steps’,
‘phases’) involved in an
audit.
Pre-engagement
This phase will require a
decision from the auditor to
accept a new client or
continue the relationship
with an
existing one. This process
would require an evaluation
of
the auditor’s qualification
and the integrity and
auditability of the client’s
financial statements.
Primary objective: To
minimize the likelihood of
being
associated with a client
whose management lacks
integrity
Acceptance of an
Engagement
In making a decision
whether to accept or reject
an
engagement, an
What is an audit?
- systematic process of
objectively obtaining and
evaluating evidence
regarding assertions about
economic actions and
events to ascertain the
degree of correspondence
between these
assertions and established
criteria and
communicating the results
thereof
Audit Process
- The sequence of different
activities (or ‘steps’,
‘phases’) involved in an
audit.
Pre-engagement
This phase will require a
decision from the auditor to
accept a new client or
continue the relationship
with an
existing one. This process
would require an evaluation
of
the auditor’s qualification
and the integrity and
auditability of the client’s
financial statements.
Primary objective: To
minimize the likelihood of
being
associated with a client
whose management lacks
integrity
Acceptance of an
Engagement
In making a decision Acceptance of an
whether to accept or reject Engagement
an In making a decision
engagement, an whether to accept or reject
an
What is an audit?
A systematic process of objectively obtaining and evaluating
evidence regarding assertions about economic actions and
events to ascertain the degree of correspondence between engagement, an auditor
these assertions and established criteria and communicating the
results thereof. should consider the
PROCESS: PACECIP
following:
1. PRE-ENGAGEMENT 1. Auditor’s competence
2. Auditor’s independence
2. AUDIT PLANNING
3. CONSIDERATION OF INTERNAL CONTROL
4. EVIDENCE-GATHERING 3. Auditor’s ability to serve
the client properly
5. COMPLETING THE AUDIT
6. ISSUANCE OF AUDIT REPORT
7. POST-AUDIT RESPONSIBILITY 4. Integrity of the
prospective client’s
management
❖ Obtain a preliminary
knowledge of the client’s
business and industry to
determine whether the
auditor has the degree of
competence required by
the engagement.
❖ Consider whether there
are any threats to the firm’s
independence and
objectivity, and if so,
whether
adequate safeguards can be
established.
❖ Evaluate the firm’s
ability to serve the
prospective
client.
❖ Evaluate auditability.
❖ Investigate the integrity
of the client’s management
through inquiry of
appropriate parties or
communication with the
predecessor auditor.
❖ Agree on the terms of
the engagement and prepare
an engagement letter
Pre-engagement
This phase will require a
decision from the auditor to
accept a new client or
continue the relationship
with an
existing one. This process
would require an evaluation
of
the auditor’s qualification
and the integrity and
auditability of the client’s
financial statements.
Primary objective: To
minimize the likelihood of
being
associated with a client
whose management lacks
integrity
1. Pre-engagement:
This phase will require a decision from the auditor to accept a
new client or continue the relationship with an existing one. This
process would require an evaluation ofthe auditor’s qualification
and the integrity and auditability of the client’s financial
statements.
Primary objective: To minimize the likelihood of being
associated with a client whose management lacks integrity
Acceptance of an Engagement
In making a decision whether to accept or reject an
engagement, an auditor should consider the following:
1. Auditor’s competence
2. Auditor’s independence
3. Auditor’s ability to serve the client properly
4. Integrity of the prospective client’s management
ALSO:
❖Obtain a preliminary knowledge of the client’s business and
industry to determine whether the auditor has the degree of
competence required by the engagement.
 the management
❖Consider whether there are any threats to the firm’s
independence and objectivity, and if so, whether adequate
safeguards can be established

.❖Evaluate the firm’s ability to serve the prospective client. C. DISAGREEMENTS

❖Evaluate auditability. between the predecessor
❖Investigate the integrity of the client’s management through
inquiry of appropriate parties or communication with the auditor and management as
predecessor auditor.

❖Agree on the terms of the engagement and prepare an

to accounting
engagement letter Matters to be discussed with the predecessor auditor
include the following:

Matters to be discussed with A. The predecessor’s understanding as to the REASONS for

change in auditors

the predecessor auditor B. Information that might bear on the INTEGRITY of the
management
include the following: C. DISAGREEMENTS between the predecessor auditor and
management as to accounting.
A. The predecessor’s
understanding as to the The engagement letter documents and confirms:
- Auditor’s acceptance of the engagement
REASONS for change in -
-
Objective and scope of the audit
Extent of auditor’s responsibilities to the client

auditors - Form of any reports

B. Information that might CONTENT OF ENGAGEMENT LETTER:

A. The presence of audit risk
bear on the INTEGRITY of B. Unrestricted access to whatever records
C. The financial reporting framework used
 5.Description of any other
D. Objective of the audit
E. The form of any reports or other communication
F. Management’s responsibility
G. The scope of the audit
letters or repo
1. Basis in which fees are computed and any billing
arrangements

ALSO: 2. Expectation of receiving representation letter

3. Acknowledgment of management of the terms of agreement
Basis in which fees are 4. Arrangements regarding the planning of the audit

computed and any billing 5. Description of any other letters or report

arrangements FOLLOWING PTS COULD ALSO BE MADE:

2.Expectation of receiving Arrangements concerning

representation letter the involvement of other
3.Acknowledgment of auditors and experts in
management of the terms of some aspects of the audit
agreement - Arrangements concerning
4.Arrangements regarding the involvement of internal
the planning of the audit auditors and other staff
- Arrangements to be made Who appoints the
with the predecessor component auditor
auditor, if applicable ● Legal requirements in
- Any restriction of the relation to audit
auditor’s liability when appointments
such a ● Degree of ownership of
possibility exists the parent
- A reference to any further ● Whether a separate
agreements between the auditor’s report is to be
issued
- Arrangements concerning the involvement of other auditors
and experts in some aspects of the audit

for the component

- Arrangements concerning the involvement of internalauditors
and other staff
- Arrangements to be made with the predecessor auditor, if
applicable ● Degree of independence
- Any restriction of the auditor’s liability when such a possibility
exists of the component’s
- A reference to any further agreements between the auditor and
the client. management from the
AUDIT OF COMPONENTS
parent entity
- Who appoints the component auditor
 - Legal requirements in relation to audit appointments
- Degree of ownership of the parent
- Whether a separate auditor’s report is to be issued for
the component
- Degree of independence of the component’s
management from the parent entity
RECURRING AUDITS
- Any indication that the client misunderstands the
objective and scope of the audit
- Any revised or special terms of the engagement
- A recent change of management, the board of
directors, or ownership
- A significant change in ownership
- A significant change in nature or size of the client’s
business
- A change in legal or regulatory requirements
- A change in financial reporting framework adopted in
the preparation of the financial statements
- A change in other reporting requirement
2. Audit Planning
Audit planning involves the development of an overall audit
strategy, audit plan, and audit program. The auditor usually
obtains more detailed knowledge about the client’s business
and industry to understand the transactions and events affecting
the financial statements.
Preliminary assessment of risk and materiality is also made
during this phase.
Primary objective: To assess the different risks associated with
the audit to determine the nature, timing, and extent of further
audit procedures necessary to be performed
3. Consideration of Internal Controls
Since an entity’s internal control directly affects the reliability of
the financial statements, it is appropriate to study and evaluate
these controls.
Primary objective: To establish a basis for reliance on internal
controls, in determining the nature, timing, and extent of audit
procedures to be performed
4. Evidence-gathering
Evidence-gathering is also known as substantive testing.Using
information obtained in audit planning and consideration of
internal controls, the auditor performs substantive tests to
determine whether the entity’s financial statements are
presented fairly in accordance with financial reporting standards.
Substantive procedures could either be analytical procedures or
tests of details of transactions and balances. The auditor will
always perform this phase.
Primary objective: To ascertain the degree of correspondence
between the financial statements prepared by the client’s
management and the financial reporting framework With this,
the auditor will be able to conclude whether or not the financial
statements are presented fairly in accordance with financial
reporting standards
Completing the Audit
Wrapping-up procedures are performed, conclusions
reached are reviewed, and an overall opinion is formed
during this phase.
Primary objective: To assist the auditor the auditor in
assessing if the conclusion reached is consistent with
evidence gathered
Issuance of the Audit Report
In this stage, the auditor prepares and issues audit
report which describes the scope of the audit and states
the auditor’s conclusion regarding the fairness of the
financial statements.
Primary objective: To communicate the conclusions
reached by the auditor to various intended users
Post-audit Responsibilities
After completion of the audit engagement, the auditor extent of audit procedures to be performed
performs procedures that will enable him/her to identify Evidence-gathering
areas for improvement in the current and future Evidence-gathering is also known as substantive testing.
engagements. Using information obtained in audit planning and
consideration of internal controls, the auditor performs
Primary objective: To assess and evaluate the quality of substantive tests to determine whether the entity’s
services delivered by the engagement team financial statements are presented fairly in accordance
Any indication that the client misunderstands the with financial reporting standards. Substantive
objective and scope of the audit procedures could either be analytical procedures or tests
➔ Any revised or special terms of the engagement of details of transactions and balances.
➔ A recent change of management, the board of The auditor will always perform this phase.
directors, or ownership Primary objective: To ascertain the degree of
➔ A significant change in ownership correspondence between the financial statements
prepared by the client’s management and the financial
➔ A significant change in nature or size of the client’s reporting framework
business
➔ A change in legal or regulatory requirements With this, the auditor will be able to conclude whether or
➔ A change in financial reporting framework adopted not the financial statements are presented fairly in
in the preparation of the financial statements accordance with financial reporting standards
➔ A change in other reporting requirement
Audit Planning
Audit planning involves the development of an overall
audit strategy, audit plan, and audit program. The auditor Completing the Audit
Wrapping-up procedures
usually obtains more detailed knowledge about the
client’s business and industry to understand the
transactions and events affecting the financial
statements.
Preliminary assessment of risk and materiality is also are performed, conclusions
reached are reviewed, and
made during this phase.
Primary objective: To assess the different risks
associated with the audit to determine the nature, timing,
and extent of further audit procedures necessary to be
performed an overall opinion is formed
during this phase.
Consideration of Internal Controls
Since an entity’s internal control directly affects the
reliability of the financial statements, it is appropriate to
study and evaluate these controls.
Primary objective: To establish a basis for reliance on
internal controls, in determining the nature, timing, and
Primary objective: To assist
the auditor the auditor in
assessing if the conclusion
reached is consistent with
evidence gathered
Issuance of the Audit
Report
In this stage, the auditor
prepares and issues audit
report which describes the
scope of the audit and states
the auditor’s conclusion
regarding the fairness of the
financial statements.
Primary objective: To
communicate the
conclusions
reached by the auditor to
various intended users
Post-audit Responsibilities
After completion of the
audit engagement, the
auditor
performs procedures that
will enable him/her to
identify
areas for improvement in
the current and future
engagements.
Primary objective: To
assess and evaluate the
quality of
services delivered by the
engagement team
5. Completing the Audit
Wrapping-up procedures are performed, conclusions reached
are reviewed, and an overall opinion is formed during this
phase.
Primary objective: To assist the auditor the auditor in
assessing if the conclusion reached is consistent with evidence
gathered
6. Issuance of the Audit Report
In this stage, the auditor prepares and issues audit report which
describes the scope of the audit and states the auditor’s
conclusion regarding the fairness of the financial statements.
Primary objective: To communicate the conclusions reached
by the auditor to various intended users
7. Post-audit Responsibilities
After completion of the audit engagement, the auditor performs
procedures that will enable him/her to identify areas for
improvement in the current and future engagements.
Primary objective: To assess and evaluate the quality of
services delivered by the engagement team
RISK ASSESSMENT PROCEDURE
The risk assessment procedures shall include the following :
(a)  Inquiries of management, and of others within the entity who
in the auditor's judgment may have information that is likely to
assist in identifying risks of material misstatement due to fraud
or error. Much of the information obtained by the auditor's
inquiries is obtained from management and those responsible
for financial reporting. However, the auditor may also obtain
information, or a different perspective in identifying risks of
material misstatement, through inquiries of others within the
entity and other employees with different levels of authority.
(b)  Analytical procedures; the analytical procedures performed
as risk assessment procedures may identify aspects of the
entity of which the auditor was unaware and may assist in
assessing the risk of material misstatement in order to provide a
basis for designing and implementing responses to the
assessed risks. Analytical procedures performed as risk
assessment procedures may include both financial and non-
financial information, for example, the relationship between
sales and square footage of selling space or volume of goods
sold.
(c)  Observation and inspection; the observation and inspection
procedures may support inquiries of management and others,
and may also provide information about the entity and its
environment. Examples of such audit procedures include
observation or inspection of the following : (i) the entity's
operations, (ii) documents (such as business plans and
strategies), records, and internal control manuals, (iii) reports
prepared by management (such as quarterly management
reports and interim financial statements) and those charged with
governance (such as minutes of board of directors' meetings),
(iv) the entity's premises and plant facilities.
Components of audit risk
The components of audit risk are:
1. inherent risk- relating to the nature of the entity;
2. control risk- concerning the entity's controls; and
3. detection risk - the risk that the auditor does not detect
deviations.
TEST OF CONTROL
Tests of controls are audit procedures designed to evaluate the
operating effectiveness of internal controls that are likely to
detect or prevent material misstatements in support of a
reduced assessed level of control risk. In other words, tests of
controls are performed to confirm that the controls tested are
working effectively in order to substantiate the reduced
assessed level of control risk.
 When to perform tests of controls:
a. When the auditor intends to rely on the operating
effectiveness of relevant controls in determining the nature,
timing and extent of substantive procedures; or
Tests of controls are performed only on those
controls that the auditor has determined are
suitably designed to prevent, or detect and correct,
a material misstatement in an assertion.
b. When substantive procedures alone cannot provide sufficient
appropriate evidence at the assertion level
 Unlike substantive tests of details, tests of controls are not
required audit procedure.
 The greater the reliance the auditor plans to place on internal
control, the more extensive the tests of those controls that need
to be performed.
 Tests of controls generally consist of one (or combination of
the following evidence gathering techniques:
a. Inquiry
b. Observation
c. Inspection
d. Reperformance of a control by the auditor
Results of tests of controls:
a. Results do not confirm effectiveness of controls – the
auditor should revise the preliminary risk assessment of control
risk from less than high to high level
In addition, the auditor shall also make the necessary revision
on the overall audit strategy, audit plan and preliminary audit
program.
In this case, the auditor’s general approach to audit would be to
use the substantive approach (an approach whose emphasis is
on substantive procedures).
b. Results confirm effectiveness of controls – the auditor  Billing
relies on the entity’s internal control and decrease substantive
testing  Recording

In this case, the auditor’s general approach to audit would be  Cash collection (and deposits)
the reliance or combined approach (an approach that uses both  Sales returns
tests of controls and substantive procedures).

Common Entries:
REVENUE AND RECEIPT CYCLE
 Sales
The Revenue Receipt Cycle
 Sales discounts
The revenue receipt cycle encompasses both the sale of goods
(revenue) and the collection of cash (receipt). The cycle is  Sales returns and allowances
related to each of the other three transaction cycles, since it:  Cash receipts
Receives resources and information provided by the financing  Allowance for uncollectible accounts
and conversion cycles.
 Write-off of specific uncollectible accounts
Provides resources and information to the expenditure/
disbursement cycle.
Scope of the Revenue/Receipt Cycle Common Forms:
Business Functions:  Customer order – a request from a customer to purchase
goods.
 Resources are sold to customers in exchange for promises
for future payments.  Sales order – identifies goods ordered by a customer,
including relevant information about price, quantity, payment
 Cash is collected from customers for resources sold to them. terms, etc.
 Shipping document – identifies goods shipped, and
represents a contract between the seller and carrier; a shipping
document is often in the form of a bill of lading.
Common Activities:
 Sales invoice – identifies goods sold and represents formal
 Customer orders (order entry) notice to a customer about the amount and terms of payment.
 Credit approval  Customer remittance advice – accompanies a sales invoice
 Inventory control but is intended to be returned with a customer’s payment
(remittance); a returned remittance advice indicates the purpose
 Shipping of cash payment, facilitating handling and recording.
Factors that influence revenue/receipt cycle activities and
controls:
 Nature of an entity’s industry
 The entity’s size and organizational structure
 The extent to which accounting information is processed by
computer