[Notes] AUDITING AND ASSURANCE
PRINCIPLES
LS 1.00 Terms of Reference
Establishing Auditing and Assurance Excellence
in the Philippines
The Auditing and Assurance Standards Council
(AASC) is an authority in establishing and
promulgating auditing standards in the Philippines
to enhance reliability, uniformity, and acceptability
of financial statements in the country.
• A ruling body in ensuring the excellence and
uniformity of auditing and assurance related
services in the country. The main objective
of the AASC is to adopt the International
Auditing and Assurance Standards Board
(IAASB) standards and practice statements
to attain uniformity of the local GAAS with
the IASB pronouncements. This
harmonization is expected to enhance the
reliability and acceptability of audited
financial statements of Philippine
companies.
• Mission statement: The Auditing and
Assurance Standards Council (AASC)
strives to attain uniformity and enhance the
reliability and acceptability of audited
financial statements of various companies in
the Philippines may adopting standards from
the IAASB.
• was created in December 2005 under the
Philippine Accountancy Act of 2004 by the
Professional Regulation Commission (PRC)
upon the recommendation of the Board of
Accountancy (BOA).
• The AC is the body authorized to establish
and promulgate generally accepted auditing
standards (GAAS) in the Philippines. at
present, AASC pronouncements are mainly
adopted from the standards and practice
statements issued by the International
Auditing and Assurance Standards Board
(IAASB).
• The main objective of the AASC in adopting
IAASB standards and practices statements is
to attain uniformity of the local GAAS with
the IAASB pronouncements. this
harmonization is expected to enhance the
reliability and acceptability of audited
financial statements of Philippine
companies. The AASC's objectives,
organization, and working procedures are set
out in the Preface to Philippine Standards on
Quality Control, Auditing, Review, other
Assurance, and Related Services.
• The ASC replaced the Auditing Standards
and Practices Council (ASPC).
• The auditing and assurance center is council
pronouncements are mainly adopted from
the standards of practice statements issued
by the IAASB. the approach and working
procedures used by the AASC in adopting
these pronouncements as well as the
authority attaching to those pronouncements
are set out in the preface to Philippine
standards on quality control, auditing,
review, other assurance, and related services
• Final ASC pronouncements, including those
pending approval by the board of
accountancy and the professional regulation
Commission.
• The Standards issued by the AASC are in
the form of the following:
o Philippine Standards on Auditing
(PSAs) are to be applied, as
appropriate, in the audit of historical
financial information.
o Philippine Standards on Review
Engagements (PSREs) are to be
applied in the review of historical
financial information.
o Philippines Standards on
Assurance Engagements (PSAEs)
are to be applied in assurance
engagements dealing with subject
matters other than historical
information.
o Philippines Standards on Related
Services (PSRSs) are to be applied
in compilation engagements,
engagements to apply agreed upon
 procedures to information and other
related services engagements as
specified by the AASC.
o Philippine Standard on Quality
Management (PSQM) [previously
Philippine Standards on Quality
Control (PSQCs)] are to be applied
for all services falling under AASC
engagement standards.
• The AASC issues Philippine Auditing
Practice Note (PAPN) [previously referred
to as Philippine Auditing Practice
Statements (PAPSs) that provide
interpretative guidance and practical
assistance to professional accountants in
implementing PSAs and to promote good
practice. Philippine Review Engagement
Practice Statements (PREPSs), Philippine
Assurance Engagement Practice Statements
(PAEPSs), and Philippine Related Services
Practice Statements (PRSPSs) are issued to
serve the same purpose for implementation
of PSREs, PSAEs, and PSRSs, respectively.
LS 1.10 Fundamentals of Auditing and
Assurances
AUDITING
• The word ‘AUDIT’ is derived from Latin
word “AUDIRE”, which means to hear.
• In olden days, some experienced people
ordinarily judges the accounts of business
people for the purpose of the correctness of
accounts.
• [PSA 200 Def.] in conducting an audit of
financial statements, the overall objectives
of the auditor are:
o to obtain reasonable assurance about
whether the financial statements as a
whole are free from material
misstatement, whether due to fraud
or error, thereby enabling the auditor
to express an opinion on whether the
financial statements are prepared, in
all material respects, in accordance
with the applicable financial
reporting framework; and
o to report on the financial statements,
and communicate as required by the
PSAs, in accordance with the
auditor's findings
• Auditing is a systematic process of
objectively obtaining evidence regarding
assertions about economic actions and
events to ascertain the degree of
correspondence between the assertions and
established criteria and communicating
results to interested users.
• Systematic Process
o Structured, framework, step by step
procedure
• Competent & Independent Person
o Must be qualified, competent,
independent mental attitude =
impartial and objective (free from
bias)
• Objectively obtains and evaluates
evidence
o Examines the management assertions
(representations)
1. Existence or Occurrence
2. Rights & Obligations
3. Completeness
4. Valuation & Allocation
5. Presentation & Disclosure
o Evaluations the results without bias
or prejudice on the individual or
entity making the representations
▪ Audit Procedures
▪ Audit Evidence
▪ Audit Opinion
• Assertions about Economic Actions &
Events
o Subject matter of auditing are the
representations or assertions made by
the individuals or entity.
• Degree of Correspondence
o Closeness with which the assertions
can be identified with established
criteria.
• Established Criteria
o Assertions comply with the
established criteria?
o Financial Reporting Standards
Council (FRSC), in the Philippine
Financial Reporting Standards

• Communicating the Results
o Referred to as ATTESTATION
o By attesting the degree of
correspondence with established
criteria through a written report:
Audited Financial Statements
• Interested Users
o Individuals who rely on the auditor’s
findings
Auditing is a structured process that..
1. Involves the application of analytical skills,
professional judgment and professional
skepticism
2. Is usually performed by a team of
professionals from directed with managerial
skills;
3. Uses appropriate form of technology and
4. Replies with the relevant technical
standards: ISAs, ISQCs, IFRS, IPSASs, &
any applicable international, national or
local equivalents as appropriate.
5. Complies with required standards of
professional ethics
GENERAL REQUIREMENTS WHEN
AUDITING FINANCIAL STATEMENTS
1. comply with relevant ethical requirements
including independence in the Conduct an
audit in accordance with the Philippine
Standards of Auditing (PSAs)
2. Apply professional judgment in planning
and performing audit
3. Obtain sufficient appropriate evidence to
reduce the risk to acceptably low level
4. perform audit with attitude of professional
skepticism
Why is independent necessary?
1. To avoid conflict of interest between
management and users of financial
statements
2. Expertise > complexity of verifying quality
of financial information
3. Remoteness > asymmetry of financial
information: affecting the quality and
reliability of financial information
Cause of Information Risk
1. Remoteness of information
2. Biases and motives of the provider
3. Voluminous data
4. Complex exchange transactions
Information Asymmetry: Auditing can have a
significant effect on reducing information risk
1. User verifies information
2. User shares information risk with
management
3. Audited financial statements are provided
Theoretical Framework of Auditing
1. Audit function operates on the assumption
that all financial data are verifiable
2. the auditor should always maintain
independence with respect to the financial
statements under audit
3. there should be no long term conflict
between the auditor and the management
4. effective internal control system reduces the
possibility of material misstatements of
financial statements
5. Consistent application of the applicable
financial reporting framework such as the
PFRS results in fair presentation of financial
statements
6. what was held true in the past will continue
to hold true in the future in the absence of
known conditions to the contrary
7. an audit benefits the public
Audit Process
The audit process in the sequence of different
activities involved in an audit. The emphasis &
order of certain activities may vary depending upon
a particular audit, but this process would basically
include the ff:
1. Issuing a Report
2. Completing the Audit
3. Performing Substantive Testing
4. Considering Internal Control
5. Audit Planning
6. Accepting an Engagement
Audit Risk. The risk that the auditor mistakenly
give a ‘clean’ or unqualified opinion on financial
statements that are materially misstated.
Reasonable Assurance. To achieve an acceptably
low level of risk.
GENERAL PRINCIPLES OF AN AUDIT
1. Compliance with Ethical Requirements
(Code of Ethics)
o Independence, integrity, objectivity,
confidentiality, professional
competence and due care,
professional behavior and technical
standards
2. Reasonable Assurance
3. Responsibility for the Financial Statements
4. Skills & Knowledge Needed in Financial
Statement Audit
5. Parties Involved in Preparing & Auditing
Financial Statements
6. The Content of Financial Statement
Auditing
7. The Business Entity as the Primary Context
of Auditing
8. Relating the Audit Process Components to
the Business Model
a. Revenue-Collection Cycle
b. Purchases-disbursements Cycle
c. Payroll
d. Inventory Warehousing Cycle
e. Financing Process
[Supplement Research] Beenegarter.com
Different Types of Audits
1. Internal Audits
 Internal audits assess internal controls,
processes, legal compliance, and the
protection of assets. The internal audit
process can be a helpful tool for businesses
to evaluate risk and identify actionable ways
to improve performance.
• Internal audits are performed by individuals
within the organization. While these
individuals aren’t independent of the
organization, they should be independent of
the activities they’re auditing.
2. External Audits
• A third party – such as an independent CPA
firm – conducts external audits. Once the
audit is complete, a report is distributed to
shareholders and stakeholders outside of the
organization.
• the main benefit is the independence and
objectivity of the audit team
• Example: A manufacturer of car parts is a
publicly traded company. Publicly traded
companies and corporations that sell their
shares to the public are required to have an
external auditor audit their financial
statements.
3. Financial Statement Audits
• involve independent auditors who will report
on whether a company’s financial statements
align with the applicable financial reporting
standards. Auditors are required to
accomplish three things:
o Identify and assess risks of material
misstatement, whether due to fraud
or error
o Obtain sufficient audit evidence
about whether material
misstatements exist
o Form an opinion on the financial
statements or determine that an
opinion can't be formed
• According to the AICPA, these audits are
“typically appropriate and often required
when seeking high levels of financing or
outside investors, or when selling a
business.” The report can help other
businesses, investors, stakeholders, etc.,
make informed decisions about the
company.
• Example: If a small business holds a loan or
line of credit with a bank, the bank may
require the business to undergo a financial
statement audit.
4. Performance Audits
• Performance audits cover a wide variety of
assessments. An entity may request or
require a performance audit to evaluate any
of the following objectives:
o Program effectiveness and results
o Internal controls
o Compliance with certain
requirements
o Prospective analysis
• These objectives are not mutually exclusive.
• Performance audits are beneficial because
they can help management and those
charged with governance and oversight
improve program performance and
operations, reduce costs, facilitate decision-
making, and contribute to public
accountability.
• Auditors must follow generally accepted
government accounting standards (GAGAS)
– aka Yellow Book – when conducting
government performance audits. According
to the AICPA, performance audits
conducted under GAGAS can provide the
highest levels of assurance, as the auditor
determines the scope based on these
requirements.
• Examples of performance audits include:
o Ensuring government services and
benefits are delivered to citizens
based on eligibility
o Providing conclusions on current and
projected trends and the potential
impact on the business
o Analyzing the cost-effectiveness of a
program or activity based on benefits
provided and results achieved
More at https://beenegarter.com/different-types-
of-audits/

LS 1.20 R.A. 9298 & Management Services

Overview

Philippine Accounting History

AD 980’s – Accounting with our trading partners,
the Malays, Chinese & Indians were as simple as
exchanging cash or goods.
1700s – The British Colonizers establishment the
first accounting firms
1890s – Americans greatly influenced the
accounting practice
1923 - the Accountancy Act 1923 was passed and ethical awareness and ethical
the first CPA certificates were issued competency and,
o to provide a culture of excellence so
1929 – PICPA was established
that accountants could develop
1967 - the Accountancy Act 1967 was passed strong values of commitment,
rationality, expertise, and
1975 – The Revised Accountancy Law 1975 was
passed PD 692
2004 - the Philippine Accountancy Act of 2004
registered the Revised Accountancy Law RA 9298

Overview of the Accountancy Profession

responsibility

Professional Regulatory Board of Accountancy

(BOA) has come up with a package of proposed
revisions of Republic Act 9298 (accountancy
law), which was promulgated way back in 2004.
• In the span of more than 12 years since the
passage of the law, there have been several
VISION changes and developments in the
To be a dynamic force towards national prosperity accountancy sector, locally and globally,
and excellence for the global perspective that have arisen. thus, the need for the
revision of the archaic law of the
MISSION accountants.
• To implement the Code of Good
Governance for the professions in the
Philippines
• Towards this end, Accountancy Professions
shall endeavors to:
o build a growing pool of accountants
who are dynamic, proactive,
responsive, and innovative
leadership in the advancement of
knowledge and the improvement of
the quality of life
o Direct the accountants towards a
high level of competence in their
field of work and strict adherence to
the code of conduct, and in this
regard to have ethical commitment,
Republic Act 9298 (Accountancy Law)
Six Areas of Revision:
1. Structural
2. Mandate of the Accountancy Regulatory
Office and the BOA
3. Practice of Accountancy
4. Accountancy Examination and Program
Matters
5. Special Revisions
6. Penalties and Sanctions
LS 1.30 Risk-Based Audit Process

Risk – is a concept used to express an uncertainty Integration of Concepts of Materiality & Risk in
or what can go wrong about events and/or their a Risk-Based Audit
outcomes that could have a material effect on the
entity. 1. Risky areas of a business must be identified
2. Testing/sampling does not provide 100%
The possibility of an event occurring that will have assurance that F/S is free of material
an impact on the achievement of the entity’s misstatements
objectives. It is measured in terms of: impact and 3. Competition for clients among audit firms is
likelihood (IIA) high
4. Develop approaches & methodologies to
allocate overall assessment of materiality to
Risk Appetite- the level of risk that an entity is individual accounts
willing to accept. 5. Not all clients are worth accepting
6. Understand society’s expectations of
financial reporting to reduce audit risk to an
FACTORS AFFECTING IMPACT OF RISK acceptably low level and minimize lawsuits.
1. Materiality (amount of loss)
2. Potential reputation or brand damage
3. Importance of the related objective to
entity’s mission
4. Duration and/or pervasiveness of the event
5. Recovery Cost
FACTORS AFFECTING LIKELIHOOD OF
RISK
1. Probability estimates based on history or
cycles
2. Complexity of activities
3. Change or stability (employee turnover or
Risk management is a process to identify, assess,
new laws)
manage & control potential events or situations to
4. Control environment (integrity and ethics)
provide reasonable assurance regarding the
5. Control processes effectiveness
achievement of the entity’s objectives.
 • Is it an ongoing process that helps an entity
to anticipate negative events, develop a
framework for effective decision-making &
profitably deploy the entity’s resources.
HAZARD vs RISK
• Hazard is something that has the potential
to harm you
• Risk is the likelihood of a hazard causing
harm
RISK-BASED APPROACH AUDIT
It begins with an assessment of the types &
likelihood of misstatements in account balance &
then adjusts the amount and type of audit work, to
the likelihood of material misstatements occurring
in account balance.
Under this approach, the auditor performs the
following:
1. Identification of the client’s strategy & the
processes for developing that strategy.
2. Examination of the core business process &
resource management
3. Identification for each of the key processes
(as well as subprocesses the objectives,
inputs, activities, outputs, systems &
transactions)
4. Assessment of the risks that the processes
will not meet the goals & controls related to Phase 1: RISK ASSESSMENT
those risks
• Assess precondition for an audit
FACTORS TO CONSIDER IN • Develop common understanding of the audit
IMPLEMENTING THE AUDIT RISK MODEL engagement with the client
1. High-risk activities • Identify and assess risks of material
2. Existence of large non-routine transactions misstatement
3. Matters requiring judgment or management • Respond to identify risks of material
intervention misstatement
4. Potential for fraud • Should occur at the business process level as
well as the entity level.
- Four Primary Factors
✓ Materiality of the amounts
▪ Large dollars/transaction
▪ High volume of
transactions
▪ Significant impact on key
ratio or disclosueres
✓ Complexity of the Process
Phase 2: RISK RESPONSE
▪ Limited internal skills
▪ Multiple data handoffs • Select controls to test, if applicable
▪ Highly technical in nature • Perform tests of controls, if applicable
✓ History of accounting • Consider the results of tests of controls, if
adjustments applicable
▪ Accounting errors o Contains substantive evidence about
▪ Valuation adjustments, accounts, disclosures, & assertions
etc. • perform substantive tests
✓ Propensity for change in
▪ Business processes or
controls

Phase 3: COMPLETING THE AUDIT &

MAKING REPORTING DECISIONS
• complete review & communication activities
• determine the type(s) of opinion (s) to issue

▪ Related accounting
BENEFITS OF THE RISK-BASED AUDIT much less work being required than
performing extensive tests of details.
1. Time Flexibility When Audit Work Needs
5. Timely Communication of Matters of
to be Performed
Interest to Management
- because risk assessment procedures do
- the improved understanding of internal
not involve the detailed testing of
control may enable the auditor to
transactions and balances, they can be
identify weaknesses in internal control
performed well before the period end,
(such as in the control environment and
assuming no major operational changes
general IT controls) that were not
are anticipated. This can help in
previously recognized. Communicating
balancing the workload of audit staff
these weaknesses to management on a
more evenly throughout the period. It
timely basis will enable them to take
may provide the client with time to
appropriate action, which is to their
respond to identified (and
benefit. This may also save time in
communicated) weaknesses in internal
performing the audit.
control and other requests for assistance
before the commencement of period-end LIMITATION OF THE AUDIT RISK-BASED
audit fieldwork. However, where interim PROCESS
financial information is not readily
1. Inherent Risk – is difficult to formally
available, the analytical risk assessment
assess
procedures may have to be performed at
2. Model risk are not independent – the
a later date
model treats each risk component as
2. Audit Team’s Effort Focused on Key
separate & independent when in fact the
Areas
components are not independent
- By understanding where the risk of
3. Audit Risk – audit risk is judgmentally
material misstatement can occur in
determined
financial statements, the auditor can
4. Audit Technology – audit technology is not
direct the audit team's effort toward
fully developed that each component of the
high-risk areas and perhaps reduce work
model can be accurately assessed.
in lower-risk areas. This will also help to
ensure that audit staff resources are used
effectively.
3. Audit Procedures Focused on Specific
Risks
- Further audit procedures are designed to
respond to assessed risks. consequently,
tests of details that only address risk in
general terms may be significantly
reduced or even eliminated.
4. Understanding of Internal Control
- The required understanding of internal
control enables the auditor to make
informed decisions and whether to test
the operating effectiveness of internal
control. Tests of controls (for which
some controls may only require testing
every three years) will often result in
LS 1.40 PSA 120 auditor is required to use the objectives stated in the
relevant PSAs in planning and performing the audit,
Framework of the Philippine Standards of
keeping in mind the interrelationships among the
Auditing
PSAs. PSA 200. 21 requires the auditor to:
A. Determine whether any audit procedures in
The ISAs on which the PSAs are based are addition to those required by the PSA's are
generally applicable to the public sector, including necessary in pursuance of the objectives
government business enterprises. However, the stated in the PSA's; and
applicability of the equivalent PSAs on Philippine B. Evaluate whether sufficient appropriate audit
public sector entities has not been addressed by the evidence has been obtained.
Council. It is the understanding of the Council that
Definitions
this matter will be addressed by the Commission on
Audit itself in due course. Accordingly, the Public A description of the meanings attributed to certain
Sector Perspective set out at the end of an ISA has terms for purposes of the PSA's. these are provided
not bee adopted into the PSAs. to assist in the consistent application and
interpretation of the PSAs. they are not intended to
override the definitions that may be established for
International Harmonization of Audit Standards other purposes, such as those contained in laws and
regulations. Unless otherwise indicated, these terms
International Auditing and Assurance Standards carry the same meanings throughout the PSA's.
Board (IAASB)
Requirements
- Develops International Standards on
Auditing (ISAs) and International This outline specific requirements, using the word
Standards Review Engagements (ISREs) “SHALL”.
- Develops International Standards on
Example in PSA 200.14
Assurance Engagements (ISAEs)
- Develops related practice statements The auditor shall comply with the relevant ethical
(IAASB Handbook, 2020 vol 1&2) requirements, including those pertaining to
independence, relating to the financial statement
audit.
Basic Parts of the Philippine Standards on
The Auditing & Assurance Standards Council
Auditing (PSAs)
(AASC) replaced the Auditing Standards and
Practices Council (ASPC). It shall have 18
regular members with a term of 3 years, renewal
Introduction for another term.
An explanation of the purpose & scope of the PSA, No. of
including how the PSA relates to other PSAs, the members
subject matter of the PSA, specific expectations on Chairman 1
the auditor & others, & the context in which the Board of Accountancy 1
Securities and Exchange Commission 1
PSA is set. Bangko Sentral ng Pilipinas 1
Commission on Audit 1
Association of CPAs in Public Practice 1
Philippine Institute of CPAs:
Objectives
Public Practice 9
The objective to be achieved by the auditor as a Commerce and Industry 1
Academe/Education 1
result of complying with the requirements of PSA. Government 1
to achieve the overall objectives of the auditor, the
Generally Accepted Auditing Standards (GAAS)
Sets the minimum standards of auditor’s
performance
• General Standards (T-I-P)
o Technical
o Training & Proficiency
o Independence
• Standards of Fieldwork (P-I-E)
o Planning
o Internal Control and Consideration
o Evidential
• Standards of Reporting (G-I-D-O)
o GAAP/PFRS
o Inconsistency
o Disclosure
o Opinion
General Standards (T-I-P)
1. The examination is to be performed by
person or persons having adequate technical
training and proficiency as an auditor.
2. In all matters relating to an engagement, an
independence in mental attitude is to be
maintained by the auditor.
3. Due professional care is to be exercised in
the performance of the audit and in the
preparation of the report.
Standards of Fieldwork (P-I-E)
1. The work is to be adequately planned and
assistants, if any, are to be properly
AASC Pronouncements: Applicable to
supervised.
2. There is to be a proper study and evaluation
of existing internal control as a basis for
reliance thereon and for the determination of
the resultant extent of the tests to which
auditing procedures are to be restricted.
3. Sufficient competent evidential matter is to
be obtained through inspection, observation,
inquiries and confirmations to afford a
reasonable basis for an opinion regarding the
financial statements under examination.
Standards of Reporting (G-I-D-O)
1. The report shall state whether the financial
statements are presented in accordance with
generally accepted accounting principles.
2. The report shall identify those circumstances
in which principles have not been
consistently observed in the current period
in relation to the preceding period.
3. Informative disclosures are to be regarded
as reasonably adequate unless otherwise
stated in the report.
4. the report shall either contain an expression
of opinion regarding the financial
statements, taken as a whole, or an assertion
to the effect that an opinion cannot be
expressed, the reasons therefore should be
stated. In all cases, when an auditor’s name
is associated with the financial statements,
the report should contain a clear-cut
indication of the character of the auditor’s
examination if any in the degree of
responsibility he is taking.
1. Audit – Philippine Standards on Auditing &
Philippine Auditing and Practice Standards
2. Review – Philippine Standards on Related
Engagements & Practice Standards Review
of historical financial information
3. Other Assurance Engagements –
Philippine Standards on Assurance
Engagements & Practice Standards
Assurance engagements dealing with
subject matters other than historical
financial information
 4. Related Services – Philippine Standards on
Related Services & Practice Standards
Compilation, Other related services
5. Quality Control – Philippine Standards on
Quality Control All services covered by
Engagement Standards
Philippine Standard on Auditing 120
FRAMEWORK OF PHILIPPINE
STANDARDS ON AUDITING
Financial Reporting Framework
3. Financial statements are ordinarily prepared
and presented annually and are directed
toward the common information needs of a
wide range of users. Many those users rely
on the financial statements as their major
source of information because they do not
have the power to obtain additional
information to meet the specific information
needs. Thus, financial statements need to be
prepared in accordance with one, or a
combination of:
a. accounting standards generally
accepted in the Philippines;
b. International Accounting Standards;
and
c. Another authoritative and
comprehensive financial reporting
framework which has been designed
for use in financial reporting and is
identified in the financial statements.

Introduction
1. The Auditing Standards & Practices Council
has been authorized to issue PSAs. The
purpose of this document is to describe the
framework within which PSAs are issued in
relation to the services which may be
performed by auditors.
2. For ease of reference, except where
indicated the term ‘auditor’ is used
throughout the PSAs when describing both
auditing & related services which may be
performed. Such reference is not intended to
imply that a person performing related
services need be the auditor of the entity’s
financial statements.

In an audit engagement, the auditor provides a high

level of assurance, but not absolute level of
assurance that the information subject to audit is
free of material misstatement. This is expressed
positively in the audit report as reasonable
assurance.
Objective of an Audit
20. The objective of audit of financial statements is
to enable the auditor to express an opinion whether
the financial statements are prepared, in all material
respects in accordance with an identified financial
reporting framework. The phrase used to express
the auditor’s opinion is “present fairly, in all
material respects.”
A similar objective applies to the audit of financial
or other information prepared in accordance with
appropriate criteria.
21. In forming the audit opinion, the auditor obtains
sufficient appropriate audit evidence to be able to
draw conclusions in which to base that opinion.
22. The auditors opinion enhances the credibility of
the financial statements by providing a high, but not
absolute, level of assurance.
Absolute assurance in auditing is not attainable as
result of such factors as we need for judgment, the
use of testing, the inherent limitations of any
accounting and internal control systems and the fact
that most of the evidence available to the auditor is
persuasive rather than conclusive in nature.
17. In a review engagement, the auditor 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.
Objective of a Review of Financial Statements
14. 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 an identified financial reporting framework. A
similar objective applies to the review of financial
or other information prepared in accordance with
appropriate criteria.
18. For agreed- upon procedures, as the auditor
simply provides a report of the factual findings, no
assurance is expressed. Instead, the 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.
Objective of Agreed-upon Procedures
17. In an engagement to perform agreed-upon
procedures, an auditor is engaged to carry out those
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. The
recipients of the report must form their own
conclusions from the report by the auditor. The
report is restricted to those parties that have agreed
to the procedures to be performed since others,
unaware of the reasons for the procedures, may
misinterpret their results.
Objective of Compilation Engagement
18. In a compilation engagement, the accountant is
engaged to use accounting expertise as opposed to
auditing expertise to collect, classify, and
summarize financial information. This ordinarily
entails reducing detailed data to manageable and
understandable form without a requirement to test
the versions underlying that information. The
procedures employed are not designed and do not
enable the accountant to express any assurance on
the financial information.

19. In a compilation engagement, although

the users of the compiled information derive some
benefit from the accountant’s involvement, no
assurance is expressed in the report.
Auditor’s Association with Financial
Information
An auditor is associated with financial information
when the auditor attaches to report to that
information or consents to the use of the auditor’s
name in a professional connection. If the auditor is
not associated in this manner, third parties can
assume no responsibility of the auditor. If the
auditor learns that an entity is inappropriately using
the auditor's name in association with financial
information, the auditor would require management
to cease doing so and consider what further steps, if
any, need to be taken, such as informing any known
third party users of the information of the
inappropriate use of the auditors name in connection
with the information. The auditor may also believe
it necessary to take other action, for example, to
seek legal advice.
LS 1 50 PSA 200 Overall Objectives of Auditor
in accordance with PSAs
Scope of PSA 200.1
- Sets out the overall objectives
- Explains the scope, authority, &
structure of the PSA
- Explains the nature & scope of an audit
designed to enable the independent
auditor to meet the
- Includes requirements establishing the
general responsibilities of the
independent auditor applicable in all
audits and obligation to comply the
Purpose of an Audit
- To enhance the degree of confidence of
intended users in the financial
statements.
- Audit of F/S PSA 200.3
✓ achieved by the expression of an
opinion by the auditor on
whether the financial statements
are prepared, in all material
respects, in accordance with the
applicable financial reporting
✓ An audit is conducted in
accordance with PSAs and
relevant ethical requirements
enable the auditor to form an
opinion.
✓ In the case of most general
purpose frameworks, the opinion
is on whether the F/Ss are
presented fairly, in all material
respects in accordance with the
framework.
Financial Statements
Subject to audit are those prepared & presented by
management of the entity with oversight of TCWG.
*TCWG - Those charged with governance means
the person(s)2 with responsibility for overseeing the
strategic direction of the entity and obligations
related to the accountability of the entity.
PSAs do not impose responsibilities on
management or TCWG and do not override laws
and regulations that govern their responsibilities.
However, an audit in accordance with PSAs is
conducted on the premise that management &
where appropriate, TCWG have responsibilities that
are fundamental in the conduct of the audit
The audit of financial statements do not relieve
management or TCWG with the governance
responsibilities.
Subject to audit are those prepared and presented by
management of the entity with oversight of those
charged with.
Audit of F/S PSA 200 A2.b
To provide the auditor with:
1. All information, such as records and
documentation, and other matters that are
relevant to the preparation and presentation
of the financial statements.
2. Any additional information that the auditor
may request from management and, where
appropriate, those charged with governance;
and
3. Unrestricted access to those within the entity
from whom the auditor determines it
necessary to obtain audit evidence
Basis of Auditor’s Opinion
PSAs require that auditor to obtain a reasonable
assurance about whether the financial statements as
a whole are free from material misstatement,
whether due to fraud or error.
Audit of F/S PSA 200.5
- Reasonable Assurance is a high level
assurance
- Obtained when the auditor has sufficient
appropriate audit evidence to reduce the
audit risk [auditor expressing an
inappropriate opinion when financial
statements are materially misstated] to
an acceptably low level.
- However, reasonable assurance is not an
absolute level of assurance, because
there are inherent limitations of an audit
which result in most of the audit
evidence on which the auditor draws
conclusions & bases the auditor’s
opinion being persuasive rather than
conclusive.
Concept of Materiality
- Applied both in planning and performing
the audit, and evaluating the effect of
identified misstatements on the audit and
of uncorrected misstatements, if any,
under financial statements
Audit of F/S PSA 200.6
- Misstatements including omissions, are
considered to be material, if individually
or in the aggregate, they could
reasonably be expected to influence the
economic decisions of the users taken on
the basis of the financial statements.
Elements in JUDGING MATERIALITY
- Surrounding circumstances
- Auditor’s perception of the financial
information needs of the users of F/S
✓ Size or nature of misstatement, or
combination of both.
Audit of Financial Statements
- Exercise of professional judgment and
maintain professional skepticism
throughout the planning & performance
of the audit and among other things:
- Audit of F/S PSA 200 7 & 8
 ✓ Identify & assess risk of material
misstatements (RoMM), whether
due to fraud or error, based on an
understanding of the entity and
its environment, including
entity’s internal control.
Professional Judgment
- The auditor shall exercise professional
judgment in planning and performing an
audit of financial statements.
- Professional Judgment – the application
of relevant training, knowledge and
experience, within the context provided
by auditing, accounting and ethical
standards, in making informed decisions
about the courses of action that are
appropriate in the circumstances of the
audit engagement.
Overall Objectives of the Auditor
- obtain sufficient appropriate audit
evidence about whether material
misstatement exist, through designing
and implementing appropriate responses
to the assessed risks.
- Audit of Financial Statements: PSA
200
✓ Materiality and audit risk
✓ The nature, timing, & extent of
audit procedures to meet the
requirements of the PSAs and
gather audit evidence.
✓ Evaluating whether sufficient
appropriate audit evidence has
been obtained, & whether more
needs to be done to achieve the
objectives of the PSAs &
thereby, the overall objectives of
the auditor.
✓ The evaluation of management’s
judgments in applying the
entity’s applicable financial
reporting framework.
✓ The drawing of conclusions
based on the audit evidence
obtained for example assessing
the reasonableness of the
estimates made by management
in preparing the financial
statements.
- Auditor’s opinion deals with the
financial statements as a whole, and
therefore the auditor is not responsible
for the detection of misstatements that
are not material to financial statements
as a whole
- IMPORTANT POINTS:
✓ The form of opinion on the
financial statements is based on
the conclusions drawn from the
audit evidence obtained
✓ The form of opinion expressed
by the auditor will depend upon
the applicable financial reporting
framework and applicable laws
or regulations.
- Audit of F/S PSA 200 11&12
a. To obtain reasonable assurance about
whether the financial statements as a
whole are free from material
misstatements whether due to fraud
or error, thereby enabling the auditor
to express an opinion on whether the
financial statements are prepared, in
all material respects, in accordance
with an applicable financial reporting
framework.
b. To report on the F/Ss, &
communicate as required by the
PSAs, in accordance with the
auditor’s findings.
- when reasonable assurance cannot be
obtained and a qualified opinion in the
auditor’s report is insufficient in the
circumstances for purposes of reporting
to the intended users of the financial
statements, the PSAs require that the
auditor disclaim an opinion or
withdraw from the engagement, where
withdrawal is legally permitted.
 ✓ Audit evidence that contradicts
other audit evidence obtained.
✓ Information that brings into
question the reliability of
documents and responses to
inquiries to be used as audit
evidence.
✓ Conditions that may indicate
possible fraud.
✓ Circumstances that suggest the
need for audit procedures in
Ethical Requirements Relating to an Audit of addition to those required by the
F/Ss PSAs.

Audit of F/S PSA 200.14 PSA 200.24: Failure to Achieve an Objective

- The auditor shall comply with relevant - Is a matter of auditor’s professional

ethical requirements, including those judgment. The judgment is based on the
pertaining to independence, relating to results of audit procedures performed
financial statement audit engagements. after complying with the PSA
requirements, evaluation of whether
Code of Ethics for Professional Accountants of the sufficient appropriate audit evidence was
Philippines obtained and whether more needs to be
done in that particular circumstances
a. Integrity
- If an objective in a relevant PSA cannot
b. Objectivity
c. Professional be achieved, the auditor shall evaluate
whether this prevents the auditor from
d. Confidentiality
achieving the overall objectives of the
e. Professional Behavior
auditor and thereby requires the auditor,
Philippine Standard on Quality Control (PSQC) in accordance with the PSA's, to modify
refers to PSA 220 deal with the firm’s the auditor's opinion or withdraw from
responsibilities to establish & maintain its system of the engagement. Failure to achieve an
quality control for audit engagements. objective represents a significant matter
requiring.
Considerations for Small Entities
Professional Skepticism
a. Concentration of ownership and
- The auditor shall plan and perform an
management in a small number of individuals (often
audit with professional skepticism
a single individual – either a natural person or
recognizing that circumstances may exist
another enterprise that owns the entity provided the
that cause the financial statements to be
owner exhibits the relevant qualitative
materially misstated.
characteristics); and
- An attitude that includes a questioning
mind, being alert to conditions which b. One or more of the following:
may indicate possible misstatement due
to error or fraud, and a critical - straightforward or uncomplicated
transactions
assessment of audit evidence.
- A18: Professional Skepticism includes - simple record-keeping
being alert to, for example:
 - few lines of business and few
products within business lines;
- few internal controls;
- few levels of management with
responsibility for a broad range of controls
LS 1.60 PSA 220 Philippine Standard of Quality
Control for Financial Statements
PSA 220: PSQC
System of Quality Control and Role of
Engagement Teams
Quality control systems, policies, and procedures
are the responsibility of the auditing firm. Under
PSQC 1 (Redrafted), the firm has an obligation to
establish and maintain a system of quality control to
provide it with reasonable assurance that:
a. The firm and its personnel comply with
professional standards and regulatory and
legal requirements; and
b. The reports issued by the firm or engagement
partners are appropriate in the circumstances.
This PSA is premised on the basis that the firm is
subject to PSQC 1 (Redrafted) or to national
requirements that are at least as demanding.
3. Within the context of the firm’s system of quality
control, engagement teams have a responsibility to
implement quality control procedures that are
applicable to the audit engagement and provide the
firm with relevant information to enable the
functioning of that part of the firm’s system of
quality control relating to independence.
4. Engagement teams are entitled to rely on the
firm’s system of quality control, unless information
provided by the firm or other parties suggests
otherwise.
Objectives:
6. The objective of the auditor is to implement
quality control procedures at the engagement level
that provide the auditor with reasonable assurance
that:
a. The audit complies with professional
standards and regulatory and legal requirements;
and
b. The auditor’s report issued is appropriate
in the circumstances.
Elements of Quality Control System:
1. Leadership responsibilities for quality on
Audits;
2. Ethical requirements
3. Acceptance and continuance of client
relationships and audit engagements
4. Human resources: Assignment of
Engagement Teams
5. Engagement Performance
6. Monitoring
1. Leadership responsibilities for quality on
Audits
8. The engagement partner shall take responsibility
for the overall quality on each audit engagement to
which that partner is assigned.
• Tone at the top (values, actions, and
messages) (behaviors and staff messages)
VMGs – Strategic Direction
• Support for quality work & quality-oriented
control culture: internal culture
• CEO or managing partners (clarity &
consistency)
In concrete:
✓ Responsibilities must not to override the
quality of work
✓ 2Ps address performance evaluation,
compensation and promotion and the firm’s
commitment to quality
 ✓ Sufficient resources for the development,
documentation and support of its quality
control 2Ps
2. Relevant Ethical Requirements
9. Throughout the audit engagement, the
engagement partner shall remain alert,
through observation and making inquiries as
necessary, for evidence of non-compliance
with relevant ethical requirements by
members of the engagement team.
10. If matters come to the engagement partner’s
attention through the firm’s system of
quality control or otherwise that indicate that
members of the engagement team have not
complied with relevant ethical requirements,
the engagement partner, in consultation with
others in the firm, shall determine the
appropriate action.
11. [INDEPENDENCE] the engagement
partner shall form a conclusion and
compliance with independence requirements
that apply to the audit engagement. In doing
so, the engagement partner shall:
a. Obtain relevant information from the
firm and, where applicable, network
firms, to identify and evaluate
circumstances and relationships that
create threats to independence;
b. Evaluate information and identified
breaches, if any, of the firm's
independence policies and
procedures to determine whether
they create a threat to independence
for the audit engagement; and
c. Take appropriate action to eliminate
such threats or reduce them to an
acceptable level by applying
safeguards, or, if considered
appropriate, to withdraw from the
audit engagement, where withdrawal
is permitted by law or regulation.
The engagement partner shall
promptly report to the firm any
inability to resolve the matter for
appropriate action.
- Code of Ethics for Professional
Accountants in the Philippines
✓ Established the fundamental
principle of professional ethics
▪ Professional behavior
▪ Confidentiality
▪ Integrity
▪ Objectivity
▪ Professional competence
▪ Due care
- Firm in the context of independence…
✓ Is independence satisfied?
✓ Are records maintained &
updated?
✓ Are actions against threats to
independence stipulated?
- sets criteria (where? 2Ps) to safeguard or
reduce familiarity threat to an acceptable
level
- for listed entities, requires rotation of
engagement partner and individuals
responsible for engagement quality
control review
✓ no more than 5 years
3. Acceptance and continuance of client
relationships and audit engagements
12. The engagement partner shall be satisfied that
appropriate procedures regarding the acceptance
and continuance of client relationships and audit
engagements have been followed, and shall
determine that conclusions reached in this regard
are appropriate.
13. If the engagement partner obtains information
that would have caused the firm to decline the audit
engagement had that information been available
earlier, the engagement partner should communicate
that information promptly to the firm, so that the
firm and the engagement partner can take the
necessary action.
A. Competence, capabilities, and resources
B. Continuance of Client Relationship
C. Considerations Specific to Public Sector Audit
Organization
D. Integrity of Client
 - Continuance of Client Relationship
o Consideration of significant matters
that have arisen during the current or
previous engagements, and their
implications for continuing their
relationship.
▪ Ex. Lack Of expertise in new
expansion
- Declining an Engagement
o Discuss with management and
TCWG for the appropriate action
o if appropriate, determine and discuss
reasons of withdrawal
o Consider professional or regulatory
or legal requirements for the firm
o Document significant issues,
consultations, conclusions, and bases
4. Human resources: Assignment of Engagement
Teams
14. The engagement partner shall be satisfied that
the engagement team, and any auditor’s experts
who are not part of the engagement team,
collectively have the appropriate competence and
capabilities to:
a. Perform the audit engagement in accordance with
professional standards and regulatory and legal
requirements; and
b. Enable an auditor’s report that is appropriate in
the circumstances to be issued.
- Capabilities & Competence are
Developed Through:
o Work experience
o Professional education
o Coaching
o Cpd-cpe and training
o Competence
o Promotion
o Career development
o Recruitment
o Performance evaluation
o Capabilities
- Assignment of Engagement Teams:
o Identify of the engagement partner
▪ Communicated to
management and those
charged with governance
o Engagement partner has:
▪ Appropriate capabilities,
competence
▪ Authority
▪ Time necessary to perform
the audit
o Clearly defined roles &
responsibilities of the engagement
partner
5. Engagement Performance: Direction,
Supervision & Performance
15. The engagement partner shall take responsibility
for:
a. The direction, supervision and
performance of the audit engagement in compliance
with professional standards and regulatory and legal
requirements; and
b. The auditor’s report being appropriate in
the circumstances
33. The firm’s review responsibility policies and
procedures shall be determined on the basis that
work of less experienced team members is reviewed
by more experienced team members.
- Engagement Partner is Responsible for:
A. Supervision
B. Review
C. Consultation
D. Consistency in the quality of engagement
performance
- Engagement Quality Control Review
(ECQR)
a) Nature, timing, & extent of an
engagement QCR:
▪ Review of F/S or selected
working papers
▪ Extent depends on the
complexity of the
engagement
b) Criteria for the eligibility of
engagement QC reviewers;
▪ Technical qualifications
 ▪ Degree of consultation with
reviewer w/o compromising
objectivity
c) Documentation requirements for an
engagement QCR
▪ Procedures required
▪ Review completed before the
report is issued
▪ Reviewer is not aware of any
unresolved matters
- Engagement Documentation
- Difference in Opinion
16. The engagement partner shall take responsibility
for reviews being performed in accordance with the
firm's review policies and procedures.
17. On or before the date of the auditor’s report,
engagement partner shall, through a review of the
audit documentation and discussion with the
engagement team, be satisfied that sufficient
appropriate audit evidence has been obtained to
support the conclusions reached and for the
auditor’s report to be issued.
Engagement Performance: Consultation
18. The engagement partner shall:
a) Take responsibility for the engagement team
undertaking appropriate consultation and
difficult or contentious matters;
b) Be satisfied that members of the engagement
team have undertaken appropriate
consultation during the course of the
engagement, both within the engagement
team and between the engagement team and
others at the appropriate level within or
outside the firm;
c) Be satisfied that the nature and scope of, and
conclusions resulting from, such
consultations are agreed with the party
consulted; and
d) Determine that conclusions resulting from
such consultations have been implemented.
Engagement Performance: Quality Control
Review
19. For audits of financial statements of listed
entities, and those other audit engagements, if any,
for which the firm has determined that an
engagement quality control review is required, the
engagement partner shall:
a) Determine that an engagement quality
control reviewer has been appointed;
b) Discuss significant matters arising during
the audit engagement, including those
identified during the engagement quality
control review, with the engagement quality
control reviewer; and
c) Not date the auditor’s report until the
completion of the engagement quality
control review.
Engagement Performance: Differences of
Opinion
22. If differences of opinion arise within the
engagement team, with those consulted or, where
applicable, between the engagement partner and the
engagement quality control reviewer, the
engagement team shall follow the firm’s policies
and procedures for dealing with and resolving
differences of opinion.
6. Monitoring
23. An effective system of quality control includes a
monitoring process designed to provide the firm
with reasonable assurance that its policies and
procedures relating to the system of quality control
are relevant, adequate, and operating effectively.
The engagement partner shall consider the results of
the firm's monitoring process as evidenced in the
latest information circulated by the firm and, if
applicable, other network firms and whether
deficiencies noted in that information may affect the
audit engagement.
- 2Ps provide reasonable assurance the firm’s
Quality Control System (QCS) is
1. Relevant
2. Adequate
3. Operating effectively
4. Complied with in practice
5. Periodic inspection of selected completed
engagements
Purpose of monitoring compliance is to evaluate:
- Adherence to professional standards &
regulatory requirements
- QCS’s design and effective implementation
- Appropriateness of the report issued
- Periodic Inspection
- Information of Results
✓ Description of monitoring procedures
✓ Conclusions drawn
✓ Description of systematic, repetitive, or
significant deficiencies
- factors considered
• Size of the firm
• Number & geographical location of offices
• Results of previous monitoring procedures
• Degree of authority of personnel & offices
• Nature & complexity of firm’s practices &
organization
• Risks associated with Client & specific
engagements