AUDITING THEORY

AND PROBLEM
CONCEPTS

Kadayunan, Minatulhamida “Alfitra” M. BSA-3

Student

Virgilio Aquino Ebreo, CPA, CTT

Professor

Book Reference: Harvey C. Chen, Auditing Theory, St. Vicente

College (Volume 1&2, 2021-2022 Edition)

May 23 2023
 AUDITING THEORY CONCEPTS
INTRODUCTION TO ASSURANCE ENGAGEMENTS

Auditing and Assurance Standards Council (AASC). The body authorized to establish
generally accepted auditing standards (GAAS) in the Philippines. AASC pronouncements are
mainly adopted from the pronouncements by the International Auditing and Assurance
Standards Board (IAASB).
The following comprises the AASC’s engagement standards:
a. Philippine Standards in Auditing (PSAs) - are applied in the audit of historical
financial information.
b. Philippine Standards on Review Engagement (PSREs) - are applied in the review
of historical financial information.
c. Philippine Standards on Assurance Engagement (PSAEs) - are applied in assurance
engagement other than audits and reviews of historical financial information.
d. Philippine Standards on Related Services (PSRSs) -

Philippine Auditing Practice Notes (PAPNs). PAPN No. 001 was issued in 2020 to guide
audit practitioners in considering the impact of COVID-19 pandemic in their audits of
financial statements in accordance with PSAs.

Philippine Standards on Quality Control (PSQCs). Issued to be applied for all services
falling under the AASCs engagement standards.

ASSURANCE ENGAGEMENT
 An engagement in which a practitioner aims to obtain sufficient appropriate evidence in
order to express a conclusion designed to enhance the degree of confidence of the
intended users.
 The practitioner must maintain his independence.
 Classified in two dimensions:
A. Either Reasonable assurance engagements or Limited assurance
a. Reasonable assurance engagement
 the practitioner reduces assurance engagement risk to an acceptably low level
as a basis for the practitioner’s conclusion
 conclusion is expressed in the positive form that conveys practitioner’s
opinion on the subject matter information
 An AUDIT is a typical example of a reasonable assurance engagement.

The objective of an 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 applicable financial reporting framework, for example, Philippine
Financial Reporting Standards (PFRSs). A typical audit provides reasonable
assurance that are financial statement are presented fairly in accordance with PFRSs.
Reasonable assurance is high but not absolute assurance.

b. Limited Assurance Engagement

 the practitioner reduces engagement risk to a level that is acceptable in the
circumstances of the engagement
 but risk is greater than for a reasonable assurance engagement
 conclusion in a negative form that conveys whether;
 based on the procedures performed and evidences obtained, a matter(s) has
come to the practitioners attention that subject matter information is
materially misstated.
 Common example of limited assurance is REVIEW ENGAGEMENT.
 The objective of a review of financial statements is to obtain limited assurance,
primarily by performing inquiry and analytical procedure, about whether the
financial statements as a whole are free from material misstatement, thereby
enabling the practitioner to express a conclusion on whether anything has come to
the practitioner’s attention that causes the practitioner to believe the financial
statements are not prepared, in all material respects, in accordance with an
applicable financial reporting framework . It involves performing procedures of
limited scope compared to an audit, and is undertaken for the purpose of
expressing limited or moderate assurance that the statements prepared in
accordance with PFRSs.

B. Either Attestation engagement or Direct engagement

a. Attestation engagement
 assurance engagement in which party other than the practitioner measures or
evaluates the underlying subject matter against the criteria.
 practitioner obtain sufficient appropriate evidence to express a conclusion
about whether the subject matter information, as prepared by the measurer or
evaluator, is free from material misstatement.
b. Direct engagement
 practitioner measures or evaluates the underlying subject matter against the
criteria and the practitioner presents the resulting subject matter information
as part of or accompanying, the assurance report.
 practitioner conclusion addresses the reported outcome of the measurement
and evaluation of the underlying subject matter against the criteria.

Practitioner who perform assurance engagements are governed by the:

A. Framework for Assurance Engagements.
B. PSAs. PSREs, PSAEs, as the case may be
C. International Code of Ethics for Professional Accountants (including International
Independence Standards)
D. International Quality Management Standards (formerly the International Standards
on Quality Control.

The Philippine Framework for Assurance Engagements mentions the following elements
of an assurance engagement:
A. A three-party relationship involving a practitioner, a responsible party, and intended
users.
 Practitioner - Auditor (firm)
 Responsible party - Management and Those Charged with Governance (TCWG)
 Intended users - Client Entity (Shareholders -listed and Partners/Proprietor-non
listed)
B. An appropriate underlying subject matter.
C. Suitable criteria
D. Sufficient appropriate evidence.
E. A written assurance report in the form appropriate to a reasonable assurance
engagement or a limited assurance engagement.

NON-ASSURANCE ENGAGEMENT
 Engagement frequently performed by CPA’s that do not provide any assurance.
 Independence is not required of a practitioner when performing non-assurance
engagements.
A. Related Services. Include agreed-upon procedures engagement and compilation of
financial or other information.
B. Preparing of tax returns where no assurance is expressed,
 C. Consulting or advisory engagements. Two-party contracts designed to provide
advice to clients to achieve their goals.

Independence
 Threats to Independence:
A. Self Review.
B. Self Interest.
C. Advocacy.
D. Familiarity.
E. Intimidation.

Professional skepticism. Means the practitioner makes a critical assessment, questioning

mind, of the validity of evidence obtained.

Assurance engagement risk. Is the risk that the practitioner expresses an inappropriate
conclusion when the subject matter information is materially misstated.

Auditing.
 Assertions (SMR&FS) - are representation which are inherent in management
representing that the financial statement are prepared in accordance with the
applicable financial reporting framework.
 objectively obtains and evaluates evidence regarding assertions such as Financial
Statement (FS) and Statement of Management Responsibilities (SMR).
 communicating results to intended users.
 from the Latin word “AUDIRE” which means “to hear”.
 Securities and Exchange Commission (SEC) - mandatory reportorial requirement.
 Audit of FS - gross annual sales, earnings, receipts or output must exceed 3,000,000.
BIR Bureau of Internal Revenue may impose penalty upon failure.
 ACCOUNTING VS. AUDITING
Prepare FS for decision making Make sure FS is reliable for intended users

General Principles governing an audit. According to PSA 200 (Revised and Redrafted), the
auditor should:
 Comply with the ethical requirements of the International Code of Ethics for
Professional Accountants, including International Independence Standard
relating to audit engagement.
 Conduct an audit in accordance with Philippine Standards on Auditing (PSAs).
 Exercise professional judgement in planning and performing an audit of financial
statements.
 Obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably
low level and to reach reasonable conclusion on which to base the auditor’s opinion.

Professional judgement. Implies the application of relevant training, knowledge and

experience, within the context provide by auditing, accounting and ethical standards, in
making informed decisions about the courses of actions that are appropriate in the
circumstances of the audit engagement.

Communicating with Those Charged with Governance. Matters to be communicated to

TCWG:
 The auditor’s responsibilities in relation to the audit.
 Planning scope and timing of the audit.
 Significant findings from the audit.
 Auditor’s independence (for listed entities)
Audit Committee (for Publicly-Listed Companies). Oversight capability over the
company’s financial reporting, inter control system, internal and external audit processes, and
compliance with applicable law and regulations.

Types of Audit
 Nature of Assertion/Data
A. Financial Statement Audit
B. Operational Audit
C. Compliance Audit
 Types of Auditor
A. Independent or External Audit
B. Internal Audit
C. Government Audit
 Depending on particular circumstances
A. Forensic audit
B. Quality Audit
C. Social Audit
D. Tax Audit
E. Environment Audit
F. Information System Audit
G. Non-statutory Audit
H. Follow-up Audit

AUDIT PROCESS:

I. Pre-Engagement Procedures
 Performed to assist the auditor in deciding whether to accept or reject an audit
engagement.
 The auditor must consider his competence, independence, and ability to serve the
client properly, and the integrity of the prospective client’s management.
 Client acceptance - meeting of minds of the practitioner and the client.
 Preliminary Planning Activities involve:
A. Establishing whether the preconditions for an audit are present.
B. Confirming that there is a common understanding between the auditor and
management including TCWG of the terms of the audit engagement.
C. Performing procedures regarding the acceptance and continuance of the client
relationship and the specific audit engagements.
D. Evaluating compliance with relevant ethical requirements in accordance with
the International Code of Ethics for Professional Accountants, including
Independence Standard.
 Preconditions for an Audit:
A. Determine whether the financial reporting framework to be applied in the
preparation of the financial statements is acceptable.
B. Obtain the agreement of management that it acknowledges and understands its
responsibility.
 Predecessor Auditor. Refers to the auditor who was previously the auditor of an
entity and who has been replaced by an incoming auditor.
 Successor Auditor. Is the auditor who is considering to accept an engagement to
audit financial statements or an auditor who has accepted such engagement.
 Audit Engagement letter. Defines the legal relationship between a professional
firm (or auditor) and its client (s). It documents and confirms the auditor’s
acceptance of the appointment.
II. Audit Planning
 The auditor should consider the following matters during the planning stage:
A. The analytical procedure to be applied as risk assessment procedures.
B. The legal and regulatory framework applicable to the entity and how the entity
is complying with that framework.
C. The determination of materiality
D. The involvement of experts and internal auditors.
E. The performance of other risk assessment procedures.
 Overall Audit Strategy. Sets the scope, timing and direction of the audit and guides
the development of the audit plan.
 Audit Plan. After the overall audit strategy has been established, the auditor should
develop and document an overall audit plan to describe the detailed scope and conduct
of the audit.
 An auditor plan should be able to describe the following matters:
A. The nature, timing and extent of planned risk assessment procedures.
B. The nature, timing, and extent of planned further audit procedures (e.g., test of
controls and substantive procedures).
C. Other planned audit procedures that are required to be carried out so that the
engagement complies with PSAs.
 Concept of Materiality. The auditor’s determination of materiality is a matter of
professional judgement. Information is Material if its omission or misstatement,
individually or in aggregate, could be reasonably be expected to influence the
economic decision of users.
A. Overall materiality (Materiality for the financial statements as a WHOLE.
B. Specific Materiality (Materiality applied to PARTICULAR classes of
transaction, account balances or disclosures.
C. Performance Materiality (LESS than the overall materiality)
 Audit Risk (AR). Refers to the risk that the auditor expresses an inappropriate audit
opinion when the financial statements are materially misstated. Audit risk is a function
of the following components:
A. Risk of Material Misstatement (RMM)
 Inherent Risk (IR) - susceptibility an assertion about a class of transaction,
account balances or disclosure to a misstatement that could be material,
either individual or aggregated, before considering of any related controls.
 Control Risk (CR) - risk that misstatement that could occur in an assertion
about a class of transaction, account balances or disclosure to a
misstatement that could be material, either individual or aggregated, will be
prevented, or detected and corrected, on a timely basis by the entity’s
control.
B. Detection Risk (DR) - risk that a material misstatement that has occurred will
not be detected by the auditor.
 So, Audit Risk Model:
AR = IR x CR x DR AR = RMM x DR
 Audit Risk and Materiality - Inverse Relationship
Audit Risk Materiality
↓ ↑
↑ ↓
  Substantive Procedure. Are procedures designed to detect material misstatements in
the financial statements. There is an inverse relationship between the acceptable level
of detection risk and the assurance provided from substantive procedures.

Assurance provided by Assessed Level of RMM Assessed Level of Detection

Substantive Procedure (IR & CR) Risk (DR)
High High Low
Low Low High

 Auditor’s Expert. Individual or organization possessing expertise in a field other than

accounting or auditing, whose work in that field is used by the auditor to assist the
auditor in obtaining sufficient appropriate audit evidence. When planning to utilize an
expert’s work, the auditor should evaluate whether the expert has the necessary
competence, capabilities, and objectivity for the auditor’s purposes.
 Audit program. Set of detailed instructions which the auditor develops and
documents to implement the overall audit plan.

III. Obtaining an Understanding of the Client and its Environment

 Risk Assessment Procedure. Are audit procedures designed and performed to

identify and assess the risk of material misstatement, whether due to fraud or error,
at the financial statement and assertion levels. Risk assessment procedures by
themselves, however, do not provide sufficient appropriate audit evidence on
which to base the auditor’s opinion. Include the following: APOII
A. Analytical Procedures
B. Observation and Inspection
C. Inquiries of management and of others appropriate individuals within the entity,
including individuals within the internal audit function (if the function exist)
 Analytical Procedure. It involves the analysis of significant ratios and trend
including the resulting investigation of fluctuations and relationships that are
inconsistent with other relevant information or which deviate from predicted
amounts. Analytical procedures may be used in the:
A. Planning Stage
B. Testing Stage
C. Completion Stage
 Business Risk. Refers to the risk resulting from significant conditions, events,
circumstances, actions or in actions that could adversely affect an entity’s ability to
achieve its objectives and execute its strategies. Business risk is broader than risk of
material misstatement of the financial statement, though it includes the latter.
 Auditor is not responsible to identify or assess all business risk because not
all business risks give rise to risks of material misstatement.
 Understanding Inherent Risk factors when understanding the Entity and its
Environment. Inherent risk factors may affect susceptibility of assertions to
misstatement by influencing the likelihood of occurrence of a misstatement or the
magnitude of the misstatement if it where to occur.

IV. Obtaining an Understanding of the Internal Control

 Systems Internal Control. As the system designed , implemented and maintained

by those charged with governance, management and other personnel, to provide
reasonable assurance about the achievement of an entity’s objectives with regards to:
A. The reliability of financial reporting.
B. The effectiveness and efficiency of operations.
C. Compliance with applicable laws and regulations.
  Internal controls can be classified into two:
A. Administrative Controls. These controls are concerned with the decision
processes leading to management’s authorization of transaction.
B. Accounting Controls. These controls are concerned with the safeguarding of
assets and the reliability of financial records.
 Management and Those Charged with Governance. Responsible for setting up
and maintaining of an effective internal control system.
 Systems Internal Control Five Components:
A. Control Environment
B. Entity’s risk assessment process
C. Entity’s process to monitor the system of internal control (monitoring)
D. Information system and communication
E. Control activities
 The auditor’s consideration of the client’s system of internal control:
Step 1. Obtain an understanding of the client’s system of internal control.
Step 2. Make a preliminary assessment of control risk.
Step 3. Determine the procedure to perform in response to assessed risk.
Step 4. Revise the preliminary control risk assessment, if necessary.
Step 5. Finalize the audit strategy, audit plan, and audit program.
 To obtain audit evidence about the design and implementation of relevant controls,
risk assessment procedures may include: IOIT
A. Inquiry of entity personnel
B. Observing the application of specific controls
C. Inspecting documents and reports
D. Tracing transactions (Walk-through test)
 Auditors Documentation. The auditor should document his undwerstanding of an
entity’s system of internal control using the following:
A. Narrative Memorandum (Description)
B. Flowchart
C. Internal Control Questionnaire
D. Decision Tables
E. Checklist

V. Assessing the Risk of Material Misstatement

 PSA 315 (Revised 2019) requires auditors to identify and assess the risks of material
misstatement in order to determine the nature, timing, and extent of further audit
procedures necessary to obtain sufficient appropriate audit evidence.
 RMM exists when there is a reasonable possibility of:
A. A misstatement occurring (e.g., its likelihood)
B. Being material if it were to occur (e.g., its magnitude)
 Identification of RMM is performed before consideration of any controls (e.g.,
inherent risk), and is based on the auditor’s preliminary consideration of
misstatements.
 Significant class of transactions, account balance or disclosure - pertains to a
class of transactions, account balance or disclosure for which there is one or more
relevant assertions.
 Assertions may fall into the following categories:
A. Assertions about classes of transaction and events, and related disclosures, for
the period under audit: Occurrence, Completeness, Accuracy, Cutoff,
Classification
B. Assertions about account balances, and related disclosures, at the period end:
Existence, Completeness, Rights and Obligation, Valuation and Allocation
 C. Assertions about presentation and disclosure: Occurrence and Rights and
Obligation, Completeness, Classification and Understandability, Accuracy
and Valuation
 Two level of RMM:
1. Financial Statement Level. RMM is pervasive to the FS as a whole and
potentially affect many assertions.
 The auditor’s overall responses are designed to address the assessed
RMM at the FS level. It may include:
a. Emphasizing to the audit team the need to maintain professional
skepticism.
b. Assigning more experienced staff or those with special skills or
using experts.
c. Changes to the nature, timing and extent of direction and supervision
of members of the engagement team and the review of the work
performed.
d. Changes to the overall audit strategy or planned audit procedures,
and may include changes to:
 The auditor’s determination of performance materiality.
 The auditor’s plan to perform test of controls.
 The nature, timing and extent of substantive procedures.
4. Assertion Level. RMM that do not relate pervasively to the FS. They are
risk that the FS assertions or amounts are materially misstated prior to
audit.
 Auditor’s assessment of RMM at the assertion level consist of two
components: Inherent risk and Control risk.
 The auditor may choose between using two general approaches to
address the assessed RMM at the Assertion level:
a. Substantive approach - emphasizes on substantive procedure.
b. Combined approach - uses test of controls as well as substantive
procedure.
Internal Control Preliminary Acceptable Level Auditor’s Response Approach
Assessment of of Detection Risk Perform Perform of
Control Risk Test of Substantive
controls procedure
Yes (at year
end, more
Bad High Low No effective & Substantive
more
extensive)
No (at
interim, less
Good Low High Yes effective & Combined
less
extensive)

VI. Designing Further Audit Procedures

 Designing and performing further audit procedures whose nature, timing, extent
are based on and are responsive to the assessed risks of RMM at the assertion level
provides a clear linkage between the auditor’s further audit procedures and the risk
assessment.
 Nature of further audit procedure. Refers to its purpose (test of controls or
substantive procedure) and its type (inspection, inquiry, observation, confirmation,
etc.).
 Timing of further audit procedure. Refers to when such procedures is performed, or
the period or date to which the audit evidence applies. The higher the RMM , the
more likely the auditor may perform substantive procedures nearer to, or at, the
 period rather than at an earlier date, or to perform audit procedure unannounced
basis.
 Extent of further audit procedure. Refers to the quantity to be performed (number of
samples to be examined). The extent of an audit procedures judged necessary is
determined after consideration of materiality, the assessed risk, and the degree of
assurance the auditor plans to obtain.

 Test of controls or compliance test. Is an audit procedure designed to evaluate the

operating effectiveness of controls in preventing, or detecting and correcting
material misstatement at the assertion level.
 Test of controls are performed to obtain evidence about the effectiveness of the:
A. Design of the system of internal control, that is, whether they are suitably
designed or not.
B. Operation of controls throughout the period.
 Test of controls usually include the following procedure:
A. Inquiries of client personnel.
B. Inspection of documents and reports.
C. Observation of employees performing the policy or procedures.
D. Reperformance of policy and procedures performed previously by the client.
E. Walk-through test.
 Matters that should be documented in the audit working papers with respect to
the evaluation of the entity’s system of internal control.
Document or not
Assessed Level of Control Risk Assessment of Control
Basis for Assessment
Risk
High Yes No
Less than high Yes Yes

VII. Performing Substantive Procedure

 Substantive Procedure. Are audit procedures designed to detect material

misstatement at the assertion level. Substantive procedures are intended to produce
evidence to support the assertion that there are no material misstatement with regard
to the completeness, validity, and accuracy of the financial statement of an entity.
 (Nature) Substantive Procedures are of two types. These are:
A. Substantive analytical procedure. These are applied to obtain audit evidence
about particular assertions related to account balances or classes of transaction.
It can identify unusual fluctuations for further audit investigation. Example:
Financial ratios
B. Test of details. These are performed to determine the actual details making up
an account balances or classes of transactions. It may be:
 Test of transaction. Test for processing individual transactions by
inspection and accounting records involved in processing.
 Test of balances. Test applied directly to the details of balances in general
ledger accounts.
 Test of disclosures. Procedures to evaluate whether overall presentation of
FS, including related disclosures.
 In detecting material misstatement in the financial statement, the auditor may choose to
perform:
A. Only Substantive analytical procedure
B. Only Test of details
C. A combination
 The decision about whether to use substantive analytical procedure or test of details is
based on the auditor’s judgement about the expected effectiveness and efficiency of the
procedures under the given circumstances.
 Timing of Substantive Procedure. Compare and reconcile information concerning the
balances at the interim date to:
A. Identify amounts that appear unusual.
B. Investigate any such amounts.
C. Perform substantive analytical procedure or tests of details to test the
intervening period.
 Extent of Substantive Procedure. The auditor may increase the extent substantive
procedures when the results from tests of control are unsatisfactory. However, increasing
the extent of an audit procedure is appropriate only if the audit procedure itself is
relevant to the specific risk.

VIII. Completing the Audit

 Analytical Procedure at Completion stage of the audit. Assist the auditor informing
an overall conclusion as to whether the financial statements are consistent with the
auditor’s understanding of the entity.
 Related parties. If one party has the ability to control the other party the ability to
exercise significant influence over the other party, or has a joint control over another
entity.
 Related party transaction (RPTs). involves a transfer of obligation between related
parties, regardless of whether a price is charged.
 Auditor’s responsibility to RPTs:
A. Perform audit procedures to identify, assess and respond to the RMM arising from
the entity’s failure to appropriately account for or disclose related party relationships,
transactions or balances.
B. Obtain an understanding of the entity’s related party relationships and transactions
sufficient to:
 Be able to conclude whether the financial statements achieve fair presentation
or are not misleading.
 Evaluate whether one or more easily committed through related parties.
 Auditor’s responsibility to entity’s litigations and claims:
A. Making appropriate inquiries of management including obtaining representations.
B. Reviewing board minutes of meeting and correspondence with the entity’s external
lawyer.
C. Examining legal expense accounts.
D. Using any information obtained regarding the entity’s business including
information obtained from discussions with any in-house legal department.
 Moreover, the auditor may seek direct communication with the entity’s
external lawyer through a letter of inquiry.
 Letter of Inquiry. Corroborates the information furnished by management about
litigation, claims and assessment. It should be prepared by management but sent by the
auditor and request the client’s external lawyer to communicate directly with the auditor.
 Subsequent Events. Are events occurring between the date of the financial statements
and the date of the auditor’s report, and facts that become known to the auditor after the
date of the auditor’s report. Two types:
A. Type 1 Subsequent Events. They relate to conditions existing at the end of the
reporting period that are inherent in the process of preparing financial statements.
These events require adjustments to the FS.
B. Type 2 Subsequent Events. They relate to conditions that do not exist at or before
the day of the financial statements, but are disclosed because they may be such
 significance that the financial statements would be misleading if the events are not
disclosed.
 Management Representation letter. Is a letter written by the management to the
auditor confirming all the representation made to him during the course of his audit.
 The purpose of the management representation letter is to emphasize the the FS
are the management’s representation, and thus management has the primary
responsibility for its accuracy.

IX. Issuing an Auditor’s Report

 Auditor’s report. Is medium (in a form of letter) through which a independent auditor
expresses his own opinion or disclaim an opinion. Must be made in writing, or may be
issued in hard copy, or using an electronic medium.
 Auditor’s opinion:
A. Unmodified or unqualified opinion
 Concludes that the financial statements are prepared, in all material respect, in
accordance with the applicable financial reporting framework.
 Concludes that, based on the audit evidence obtained, the financial statements
as a whole are free from material misstatement.
 Is able to obtain sufficient appropriate audit evidence to conclude that the
financial statements as a whole are free from material misstatement.
B. Modified or qualified opinion
 Auditors believe that “except for” some qualifications or exceptions, the FS
have been prepared, in all material respect, in accordance with the applicable
financial reporting framework.
 The auditor, having obtained sufficient appropriate audit evidence concludes
that misstatement, individually or in aggregate, are material, but not pervasive,
to the financial statements.
 The auditor is unable to obtain sufficient appropriate audit evidence on which
to base an opinion, but the auditor concludes that the possible effects on the FS
of undetected misstatements, if any, could be material but not pervasive.
C. Adverse opinion
 The financial statements have not been prepared, in all material respect, in
accordance with the applicable financial reporting framework.
 The auditor, having obtained sufficient appropriate audit evidence concludes
that misstatement, individually or in aggregate, are both material and pervasive
to the financial statements.
D. Disclaimer (not practically an opinion or no opinion)
 The auditor is unable to obtain sufficient appropriate audit evidence on which
to base an opinion, but the auditor concludes that the possible effects on the FS
of undetected misstatements, if any, could be both material and pervasive.
 Modification of opinion. Depends on the pervasiveness of misstatements on the
financial statements.
Auditor’s Judgement About the Pervasiveness of
the Effects or Possible Effects on FS
Nature of Matter Giving Rise to the Modification
Material but Not
Material and Pervasive
Pervasive
FS are materially misstated Qualified Adverse
Inability to obtain sufficient appropriate audit
Qualified Disclaimer
evidence

 Elements of an Independent Auditor’s Report:

A. Title - “Independent Auditor’s Report”

B. Addressee - Client (engaging party)

C. Auditor’s Opinion
 Name entity whose FS have been audited
 State that the FS have been audited
 Enumerate the title of each FS
 Refer to note, including summary of significant accounting policies
 Specify the date or period covered by each FS

D. Basis for Opinion

 State the audit was conducted in accordance with Philippine Standards on
Auditing.
 Refer to the section of the auditor’s report that describes the auditor’s
responsibilities under PSAs.
 Include a statement that the auditor is independent on the entity in accordance
with relevant ethical requirements.
 State whether the auditor believes that the audit evidence obtained is sufficient
and appropriate to provide a basis for an opinion.

E. Going Concern - auditor should consider material uncertainty.

F. Key Audit Matters - most significant in the audit of FS of the current period.

G. Responsibilities of Management for the Financial Statements - Management

responsible for:
 The Internal control of the entity and preparing FS in accordance with
applicable financial reporting framework.
 Assessing the entity’s ability to continue as going concern.

H. Auditor’s Responsibility for the Audit of the Financial Statements

 Objectives of the auditor are to obtain reasonable assurance and issue a report
that includes the auditor’s opinion.
 Reasonable assurance is high level of assurance
 Misstatements can rise from fraud or error.

I. Other Reporting Responsibilities - report on other legal and regulatory

requirements.

J. Name of the Engagement Partner - included only for listed entities.

K. Signature of the Auditor - signed in the name of the auditing firm registered with
the Board of Accountancy (BOA) and the Securities and Exchange Commission
(SEC), or in the personal name of the auditor, or both.

L. Auditor’s address - name of the location in the jurisdiction where the auditor
practices or where the auditor maintains the office.

M. Date of the Auditor’s Report - completion date of the audit or last day of field
work.
 REVIEW ENGAGEMENT:

 PSRE 4200 (Revised), “Engagements to Review Historical Financial Statements”,

applies to reviews of historical financial information by a practitioner other than the
entity’s auditor. The objective of review of financial statements is to obtain limited
assurance, primarily by performing inquiry and analytical procedures.

 Review engagement provides a moderate or limited level of assurance that the

information subject to review is free from material misstatements. This is expressed in
the form of negative assurance.

General principles governing Review Engagement:

 Conduct a review in accordance with Philippine Standards on Review
Engagements (PSREs).
 Comply with the ethical requirements of the International Code of Ethics for
Professional Accountants (including Independence Standard) .
 Perform the engagement in accordance with the firm’s quality management policies
and procedures as required by the Philippine Standards on Quality management
(PSQM).
 Plan and perform the review with professional skepticism recognizing that
circumstances may exist which cause the the FS to be materially misstated.
 Obtain sufficient appropriate evidence through inquiry and analytical procedures to
be able to issue a negative assurance.

 Preconditions for Review Engagement

A. Determine whether the financial reporting framework applied in the preparation
of the financial statements is acceptable.
B. Obtain the agreement of management that it acknowledges an understands its
responsibilities.

 Elements of Review Engagement:

A. Title - “Independent Practitioner’s Review Report”

B. Addressee - Client entity (either Shareholder or TCWG)

C. Introductory paragraph
 State that the financial statement have been reviewed.
 Identify the financial statement review.
 Enumerate the title of each FS.
 Refer to note, including summary of significant accounting policies.
 Specify the date or period covered by each FS.

D. Management’s responsibility - Management responsible for:

 The Internal control of the entity and preparing FS in accordance with
applicable financial reporting framework.

E. Practitioner’s Responsibility
 Description of the practitioner’s responsibility to express a conclusion of
the FS, including reference to PSA 2400 (Revised) and, relevant, applicable
law and regulation.
 State that review engagement is limited assurance engagement.
 State that the practitioner performs procedures, primarily consist of making
inquiries of the management and other within the management, applying
analytical procedures, and evaluates evidence obtained.
  State that procedures performed in the review is less than those performed
in an audit and the practitioner does not express an opinion on the FS.

F. Practitioner’s Conclusion - include the heading “Conclusion”

“Based on our review, nothing has come to our attention that causes us to believe
that the financial statements do not present fairly, in all material respect (or do not
give and fair view),... in accordance with the applicable financial reporting
framework”.

G. Other reporting responsibilities (if applicable)

H. Practitioner’s signature - signed in the name of the auditing firm registered

with the Board of Accountancy (BOA) and the Securities and Exchange
Commission (SEC), or in the personal name of the auditor, or both.

I. Date of the Practitioner’s report - no earlier than the date on which the
practitioner sufficient appropriate evidence.

J. Practitioner’s address - name of the location in the jurisdiction where the

auditor practices or where the auditor maintains the office.

FRAUD, ERRORS AND NONCOMPLIANCE (NOCLAR)

 Misstatement. Is the difference between the amount, classification, presentation, or

disclosure of a reported financial statement item and the amount, classification,
presentation, or disclosure that required for the item to be in accordance with the
applicable financial reporting framework.
 Misstatement in the financial statements can either be:
A. Error -unintentional misstatement in FS.
B. Fraud - intentional act by one or more individuals within the entity.
 Two types of fraud:
A. Fraudulent financial reporting - intentional misstatement or omission of amounts or
disclosure to deceive FS users.
B. Misappropriation of assets or Defalcation - theft of entity’s assets.
 Non-compliance or NOCLAR. Are acts of omission or commission, intentional or
unintentional, committed by the entity, individuals working under the entity, which are
contrary to the prevailing laws or regulation. Noncompliance does not include personal
misconduct unrelated to the business activities of the entity.

CONTROL PROCEDURES FOR REVENUE AND EXPENDITURE

CYCLE
 Revenue/ receipt cycle. Encompasses the processing of customer orders and making
sales, delivery of goods and services to customers, accounting for customer accounts
receivable, collecting and depositing cash received from customers, and reconciling bank
statements.
 Activities in the revenue/ receipt cycle:
A. Sales Department
B. Credit Department
C. Warehouse
D. Shipping Department
 E. Billing Department
F. Mailroom
G. Cashier’s Department
H. General Accounting Department

CONTROL PROCEDURES FOR PAYROLL, CONVERSION,

INVESTING AND FIANANCING CYCLES
 Personnel and Payroll cycle has the following business functions:
A. Resources (services) are acquired from employees in exchange for obligation to pay.
B. Obligations to employees are paid.
 Departments usually involved in the personnel and payroll cycle:
A. Personnel or Human Resource (HR) Department.
B. Production Department(s).
C. Payroll Department
D. Cash Disbursement Department

AUDIT EVIDENCE AND DOCUMENTATION

 Audit evidence. All information used by the auditor in arriving at the conclusion on
which the audit opinion is based.
 Sufficiency of audit evidence. Pertains to the measure of quantity of audit evidence.
 Appropriateness of audit evidence. It is the measure of quality of audit evidence.
 Audit documentation or working papers. Refer to the record of audit procedures
performed, relevant audit evidence obtained,and conclusion reached by the auditor.

AUDIT SAMPLING

 Selecting items for testing:

A. Selecting all items or 100% examination - is often used for substantive procedure as
opposed for test of controls.
B. Selecting specific items - this method is somewhat objective and may result to an
increased level of nonsampling risk.
C. Audit sampling - involves the application of audit procedures to less than 100% of
the items within a population of audit relevance.
 General approaches to sampling:
A. Statistical sampling
B. Nonstatistical sampling