MET 2.

ACAUD 227 Auditing and Assurance basis upon which it is to be performed has been
Principles agreed, through:
a. Establishing whether the preconditions for an
audit are present; and
LS 200 PSA 210 Agreeing the Terms of Audit
Engagement b. Confirming that there is a common
understanding between the auditor and
management and, where appropriate, those
charged with governance of the terms of the
audit engagement.

Definitions
4. For purposes of the PSAs, the following term
has the meaning attributed below:
Preconditions for an audit – The use by
management of an acceptable financial reporting
framework in the preparation of the financial
statements and the agreement of management
and, where appropriate, those charged with
governance on the premise on which an audit is
conducted.

PSA 210.6. Requirements: Preconditions for

an audit
a. Determine whether the financial
reporting framework to be applied in the
preparation of the financial statements if
it is applicable
b. Obtain the agreement of management
that is acknowledges and understands it
responsibility,
a. For the preparation of the F/S in
accordance with the applicable
PSA 210: Agreeing the Terms of Audit financial reporting framework
Engagement including where relevant their
presentation.
b. For such internal control as
Objective management determines it
3. The objective of the auditor is to accept or necessary to enable the
continue an audit engagement only when the preparation of F/S that are free
from material misstatement
whether due to fraud or error.
 c. To provide the auditors with: trustworthy, competent, and does he/she
a. Access to information of which have a good attitude toward internal
management is aware that is control?
relevant in the preparation of the - Is it possible to develop an overall
F/S such as records, docs, and response and further audit procedures
other matters that would respond appropriately to the
b. Additional information that the assessed risk factors? For example, can
auditor may request from substantive procedures be used to
management for the purpose of determine that all revenues and liabilities
the audit; and are properly recorded in the accounting
c. Unrestricted access to persons records?
within the entity from whom the
Before contacting 3rd parties & collecting
auditor determines it necessary to
information on a prospective client, take steps to
obtain audit evidence.
ensure that all partners & staff are aware of:
a. The firm’s policies to protect confidential
information maintained on clients
b. Requirements of any privacy legislation
c. Requirements of the applicable code of
ethics

Process to Accept or Continue with an Audit

Engagement
Considerations
There may be some very small entities requiring
9. The auditor shall agree the terms of the audit
an audit where the owner-manager runs the
engagement with management or those charged
entity, has few (if any) formal documented
with governance, as appropriate.
controls in place, and can therefore override just
about everything. In these situations, the auditor 10. Subject to paragraph 11, the agreed terms of
has to determine whether the absence of control the audit engagement shall be recorded in an
activities or of other components of control may audit engagement letter or other suitable form of
make it impossible to obtain sufficient written agreement and shall include:
appropriate audit evidence. If this is the case, the
a) The objective and scope of the audit of the
auditor would exercise professional judgment in
financial statements;
determining whether the engagement should be
b) The responsibilities of the auditor;
declined or a modified opinion provided.
c) The responsibilities of management;
Factors to consider include: d) Identification of the applicable financial
reporting framework for the preparation
- The entity’s control environment. For
of the financial statements; and
example: is the owner-manager
 e) Reference to the expected form and [The objective and scope of the audit]
content of any reports to be issued by the
You have requested that we audit the financial
auditor and a statement that there may be
statements of ABC company, which comprises
circumstances in which a report may
the balance sheet as at December 31, 20X1, and
differ from its expected form and content.
the income statement, statement of changes in
11. If law or regulation prescribes in sufficient equity and cash flow statement for the year then
detail the terms of the audit engagement ended, and a summary of significant accounting
referred to in paragraph 10, the auditor need not policies and other explanatory information. We
record them in a written agreement, except for are pleased to confirm our acceptance and our
the fact that such law or regulation applies and understanding of this audit engagement by
that management acknowledges and means of this letter. Our audit will be conducted
understands its responsibilities as set out in with the objective of our expressing an opinion
paragraph 6(b). on the financial statements.
12. If law or regulation prescribes [The responsibilities of the auditor]
responsibilities of management similar to those
We will conduct our audit in accordance with the
described in paragraph 6(b), the auditor may
Philippine Standards on Auditing (PSAs). Those
determine that the law or regulation includes
standards require that we comply with ethical
responsibilities that, in the auditor’s judgment,
requirements and plan and perform the audit to
are equivalent in effect to those set out in that
obtain reasonable assurance about whether the
paragraph. For such responsibilities that are
financial statements are free from material
equivalent, the auditor may use the wording of
misstatement. An audit involves performing
the law or regulation to describe them in the
procedures to obtain audit evidence about the
written agreement. For those responsibilities
amounts and disclosures in the financial
that are not prescribed by law or regulation such
statements. The procedures selected depend on
that their effort is equivalent, the written
the auditor’s judgment, including the assessment
agreement shall use the description in paragraph
of the risks of material misstatement of the
6(b).
financial statements, whether due to fraud or
PSA 210: Agreeing the Terms of Audits – error. An audit also includes evaluating the
Recurring Audits appropriateness of accounting policies used and
the reasonableness of accounting estimates
13. Under recurring audits, the auditor shall
made by management, as well as evaluating the
assess whether circumstances require the terms
overall presentation of the financial statements.
of the audit engagement to be revised and
whether there is a need to remind the entity of
the existing terms of the audit engagement.
16. if the terms of the audit engagement are
changed, the auditor and management shall
agree on and record the new terms of the
engagement in an engagement letter or other
suitable form of written agreement.
Engagement Letter
To the appropriate representative of
management or those charged with governance
of ABC Company.
An Engagement Letter is Required to be
Revised when the Circumstances Change such
as: Opening conference or Survey Meeting
1. Any revised or special terms of the AGENDA
engagement
1. Introduction
2. Recent change in senior management
2. Business updates
3. Significant change in ownership
3. Our audit approach
4. Management misunderstanding the
4. Areas of focus
objective and scope
5. Management’s responsibilities
5. Change in other reporting requirements
6. Reports and timetable
6. Change in legal or regulatory
7. Other matters
requirements
7. Change in financial reporting framework
LS 210 PSA 230 Audit Documentation
“If not documented, then not done”

PSA 230: Scope of this PSA

1. This PSA deals with the auditors
responsibility to prepare audit
documentation for an audit of financial
statement. It is to be adapted as necessary

in the circumstances when applied to

audits of other historical financial
information. The Appendix lists other
PSAs that contain specific documentation
requirements and guidance. The specific
documentation requirements of other
PSAs do not limit the application of this
Ownership of Audit Files PSA. Laws or regulations may establish
Working papers are the auditor’s property, not additional documentation requirements.
the clients. In most cases, an auditor can not
reveal information in the working papers
without the client’s permission.
Confidentiality of audit files
Auditor’s responsibility is to maintain
confidentiality of information-ethical,
professional & legal implications. Prevent
unauthorized access to the audit documentation.
Not regard audit documentation as a part of, or a
substitute for, the client’s accounting records.