LS 1.

00
PSA 100: PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS
Fundamentals of Auditing and Assurance Services
Assurance
❖ Overview Services
Assurance Services – independent professional services that any
improve the quality of information, or its context, for information
decision makers Attestation
• Attestation services – occur when a practitioner is Services
engaged to issue a report on a subject matter, or primarily FS
an assertion about subject matter, that is the
responsibility of another party.
o Auditing – is a systematic process of Auditing
objectively obtaining and evaluating evidence financial
statements
regarding assertions about economic actions
and events to ascertain the degree of
correspondence between these assertions and
established criteria and communicating the results to intended users

❖ PSA 100 and the Two Types of Assurance Engagements

Assurance Engagements – an engagement in which a practitioner expresses a conclusion
designed to enhance the degree of confidence of the intended users other than the
responsible party about the outcome of the evaluation or measurement of a subject matter
against criteria

2 Types of Assurance Engagements

Type of Reasonable Assurance Engagement
Engagement
Objective A reduction in assurance engagement
risk to an acceptably low level in the
circumstances of the engagement, as
the basis for a positive form of
expression of the practitioner’s
conclusion
Evidence Sufficient appropriate evidence is
Gathering obtained as part of a systematic
Procedures engagement process that includes:
- Obtaining understanding of the
engagement circumstances
- Assessing risks
- Responding to the assessed risk
- Performing further procedures
(substantive procedures)…
- Evaluating the evidence obtained
Assurance Report Description of the engagement
circumstances, and positive form of
conclusion
Limited Assurance Engagement
A reduction in assurance
engagement risk to a level that is
acceptable in the circumstances of
the engagement but where that risk
is greater than for a reasonable
assurance engagement, as the basis
for a negative form of expression of
the practitioner’s conclusion
Sufficient appropriate evidence is
obtained as part of systematic
engagement process that includes
obtaining an understanding of the
subject matter and other
engagement circumstances, but in
which procedures are deliberately
limited relative to a reasonable
assurance engagement
Description of the engagement
circumstances, and negative form of
the conclusion
❖ PERCS: Elements of Assurance Engagements
Three Party Evidence Assurance Suitable Criteria Subject Matter
Relationship Report
1. Practitioner Plans & Provides a Benchmarks used • Financial
2. Responsible performs an written report to evaluate the statements
Party assurance containing a subject matter • Non-financial
3. Intended engagement conclusion that • Physical
Users with an conveys the RUN-CR: characteristics
attitude of assurance Relevance • Systems &
professional obtained about Understandability Processes
skepticism the subject Neutrality • Behavior
matter Completeness
Considers: information Reliability
Materiality,
engagement
risk, quantity &
quality of
evidence

❖ Management’s Assertions
• Existence – verifies assets, liability, & equity exist in the financial statement at a given
date
• Occurrence – used to determine whether the transaction recorded on financial
statements have been taken place
• Accuracy – looks at specific transactions and then checks the accuracy of the recorded
entry to determine whether the amounts are recorded correctly
• Valuation & Allocation – used to determine that the financial statements presented have
all been recorded at the proper valuation
• Cut-off – used to determine whether the transactions have been recorded in the
appropriate accounting period
• Completeness – verifies that transactions for the period being examined have been
properly entered in the correct period
• Rights & Obligations – are used to determine that assets, liabilities, and equity
represented in the financial statements are the property of the entity being audited
• Classification – addresses the financial statements themselves; its acceptable format, all
the necessary information included, understandability, etc.

❖ Audit Assertions in 3 Different Levels

Presentation & Disclosure
Transaction Level Assertions Account Balance Assertions
Assertions
Used when examining journal Used when examining asset, Used to determine proper
entries & transactions liability, & equity totals format & clarity
Completeness
Rights and Obligations Accuracy
Accuracy
Existence Occurrence
Classification
Completeness Completeness
Occurrence
Valuation Classification
Cut-off
❖ Non-assurance Engagements
o Engagements covered by Philippine Standards for Related Services, such as agreed-upon
procedures engagements and compilations of financial or other information
o The preparation of tax returns where no conclusion conveying assurance is expressed
o Consulting (or advisory) engagements, such as management and tax consulting

The following are not performed using assurance engagements:

a. Engagements to testify in legal proceedings regarding accounting, auditing, taxation & other
matters.
b. Engagements that include professional opinions, views, or wordings which a user may derive
some assurance, if all the following apply:
- Those opinions, views, or wording are merely incidental to the overall assurance
engagement
- Any written report issued is expressly restricted for use by only the intended users
specified in the report
- Under a written understanding with the specified users, the engagement is not
intended to be an assurance engagement, and
- The engagement is not represented as an assurance engagement in the
professional accountant’s report

❖ Accepting an Engagement
A practitioner accepts an assurance engagement only where the practitioner’s preliminary
knowledge of the engagement circumstances indicates that:
• Relevant ethical requirements: Independence & Competence
• Appropriate subject matter
• Criteria to be used are suitable & available to intended users
• Access to sufficient appropriate evidence
• The practitioner’s conclusion, in the form appropriate to either a reasonable
assurance engagement or a limited assurance engagement, is to be contained in a
written report
• Presence of rational purpose of the engagement

❖ Assurance & Non-Assurance Services

Assurance Services Non-Assurance Services
• Audits
• Reviews
Other Review Engagements:
o Assurance Services on Information • Agreed-upon Procedures Services
Technology
• Compilation of Financial or other
o CPA Web Trust Service
information
o Information System Reliability Service
• Tax Services
o Assurance Services on Other Types of
• Mgt. Consulting/Advisory Services
Information
• Acctng & Data Processing or IT System
o Business Performance Services
Services
o Health Care Performance
Measurement
o Risk Assessment
o Eldercare Plus
 LS 1.10
OVERVIEW
Fundamentals of Auditing and Assurance Services

❖ Auditing
Audit – derived from Latin word “Audire” which means to hear
- Auditing: is a systematic process by which a competent, In olden days, some experienced
independent person objectively obtains and evaluates people ordinarily judges the
evidence regarding assertions about economic actions accounts of business people for
and events to ascertain the degree of correspondence the purpose of the correctness
of accounts
between those assertions and established criteria and
communicating the results to interested users
(American Accounting Association, AAA)

Systematic Process
This implies a structured, logical, and organized series of steps and procedures.

Competent, Independent Person

The auditor must be qualified to understand the criteria used and the competence to know
how and what evidence to accumulate to reach a proper conclusion. The auditor must also
have an independent mental attitude which involves impartial and objective thinking

Objectively Obtains and Evaluates Evidence

This means examining the bases for the assertions and judiciously evaluating the results
without bias or prejudice either for or against the individual (or entity) making the
representations

Assertions about Economic Actions and Events

These are the representations made by the individual or entity. They comprise the subject
matter of auditing

Degree of Correspondence
Refers to the closeness with which the assertions can be identified with established criteria

Established Criteria
These are the standards against which the assertions or representations are judged

Communicating the Results

Referred to attestation. By attesting to the degree of correspondence with established
criteria through a written report: Audited Financial Statements

Interested Users
Individuals who use (rely on) the auditor’s findings.
❖ Overall Objectives of Auditing
In conducting an audit of financial statements, the overall objectives of the auditor are
(PSA 200, 11):
a. 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 aspects, in accordance with an applicable financial reporting
framework; and
b. To report on the financial statements, and communicate as required by the PSAs, in
accordance with the auditor’s findings

❖ Auditing as a Structured Process

Auditing is a structured process that…
a. Involves the application of analytical skills, professional judgment & professional
skepticism
b. Is usually performed by a team or professionals, directed with managerial skills;
c. Uses appropriate form of technology and
d. Complies with relevant technical standards: ISAs, ISQCs, IFRS, IPSASs, & any
applicable international, national, or local equivalents as appropriate
e. Complies with required standards or professional ethics

❖ Major Types of Audits

Audit Procedures Financial Audit Compliance Audit Operational Audit
Is conducted to It involves a review of It’s a study of a
determine whether an organization’s specific unit of an
the financial procedures to organization for the
statements of an determine whether purpose of measuring
Primary Audit entity are fairly the organization has its performance,
Objectives presented in adhered to specific identify areas for
accordance with the procedures, rules, or improvements &
applicable financial regulations make
reporting framework recommendations to
improve performance
That the F/S are fairly That the organization That the
presented has complied with organization’s
Assertions made by
laws, regulations, or activities are
the Auditee
contracts conducted effectively
& efficiently
Financial reporting Laws, regulations, Objectives set by the
Established Criteria framework such as and contracts board of directors
PFRS
An opinion about Reports on the Recommendations or
whether the F/s are degree of compliance suggestions on how to
Content of the fairly presented in with the applicable improve operations
Auditor’s Report conformity with the laws, regulations &
applicable reporting contracts
framework
❖ Types of Auditors
• Independent Auditors/External Auditors – CPAs who offer their professional services to
different clients on a contractual basis
• Internal Auditor – entity’s own employees who investigate & appraise the effectiveness &
efficiency of operations & internal controls
• Government Auditors – government employees whose main concern is to determine
whether persons or entities comply with government laws and regulations

❖ Role of Management & Independent Auditor

Management Independent Auditor

- Prepares unaudited financial - Evaluates F/S to determine whether the

statements F/s prepared by the management
- Provides all the financial data conforms to the established criteria

- Assits the auditors

Audited F/S adds credibility to the report
- Receives the audit
and reduces information risk
- Report on F/Ss

Users of Financial Statements

❖ General Requirements When Auditing Financial Statements

- Comply with the relevant ethical requirements including independence
- Conduct an audit in accordance with the Philippine Standards of Auditing (PSAs)
- Apply professional judgment in planning and performing the audit
- Obtain sufficient appropriate audit evidence to reduce the risk to an acceptably low
level
- Perform the audit with an attitude of professional skepticism

❖ Users Audited Financial Statements

Users Types of Decisions
Management Review performance, make operational
decisions, report results to capital markets
Stockholders Buy or sell stock
Bondholders Buy or sell bonds
Financial Institutions Evaluate loan decisions, considering
interest rates, terms, and risk
Taxing Authorities Determine taxable income and tax due
Regulatory Agencies Develop regulations and monitor
compliance
Labor Unions Make collective bargaining decisions
 Court System Assess the financial position of a company
in litigation
Vendors Assess credit risk
Retired Employees Protect employees from surprises
concerning pensions and other post-
retirement benefits

❖ Why is Independent Necessary?

▪ Information risk – the possibility that information on which a business decision was made
was inaccurate

Factors that contribute to information risk:

• Remoteness of information users from information providers
• Potential bias and motives of information provider
• Voluminous data
• Complex exchange transactions
• Consequences : when financial information is not reliable, investors and other
users lose a significant source of information that they need to make decisions that
have important consequences

Auditing can have a significant effect on reducing information risk as…

- User can verify the information
- User shares information risk with management
- Audited financial statements are provided

Why Independent is Necessary? (PSA 120)

3. Financial statements are ordinarily prepared and presented annually and are directed
toward the common information needs of a wide range of users. Many of 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 their 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

❖ Theoretical Framework of Auditing

• Audit function operates on the assumption that all financial data are verifiable
• The auditor should always maintain independence with respect to the financial
statements under audit
• There should be no long-term conflict between the auditor and the management
• Effective internal control system reduces the possibility of material misstatements of
the financial statements
• Consistent application of the applicable financial reporting framework such as the
PFRS results in fair presentation of financial statements
 • What was held true in the past will continue to hold true in the future in the absence
of known conditions to the contrary
• An audit benefits the public

❖ General Approach to Auditing Financial Statements

❖ Audit Process
- Is 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:
-

Auditing Process

Financial Statement Auditing Process

3 Fundamental Concepts: Materiality, Audit Risk, Evidence

❖ Materiality
• Material Misstatements – occurred when it could reasonably be expected to
influence the economic decisions of users made on the basis of the financial
statements
Risk Nature Source
Inherent and Control The financial statements Entity
Risks may contain a material objectives/operations and
misstatement management’s
 design/implement of
internal control
Detection risk The auditor may fail to Nature and extent of the
detect a material procedures performed by
misstatement in the the auditor
financial statements

• Materiality – refers to the amount by which a set of FS could be misstated w/o

affecting the judgment of a reasonable person
- Magnitude of an omission or misstatement

Scope of PSA 320

This Philippine Standard on Auditing (PSA) deals with the auditor’s responsibility to
apply the concept of materiality in planning and performing an audit of financial
statements. PSA 450 (revised and redrafted) explains how materiality is applied in
evaluating the effect of identified misstatements on the audit and of uncorrected
misstatements, if any, on the financial statements.

❖ Audit Risk
- The risk that the auditor mistakenly give a “clean”
or unqualified opinion on financial statements that
are materially misstated

❖ Audit Evidence (PSA 230-Objective)

5. The objective of the auditor is to prepare
documentation that provides
a. A sufficient (quantity) and appropriate (quality)
record of the basis for the auditor’s report; and
b. Evidence that the audit was planned and performed in accordance with PSAs and
applicable legal and regulatory requirements
❖ Management Assertions
Assertions – are representations by management, explicit or otherwise, that are
embodied in the financial statements.
- Relate to the recognition, measurement and presentation of classes
of transactions and events, account balances and disclosures in the
financial statements

Classes of Transactions & Events

• Occurrence – transactions and events that have been recorded or disclosed have
occurred, and such transactions and events pertain to the entity
• Completeness – all transaction and events that should have been recorded, and all
related disclosures that should have been included in the financial statements have
been included
• Authorization – all transactions and events have been properly authorized
• Accuracy – amount and other data relating to the recorded transactions and events
have been recorded appropriately, and related disclosures have been appropriately
measured and described
• Cutoff – transactions and events have been recorded in the correct accounting
period
• Classification – transaction and events have been recorded in the proper accounts
• Preparation – transaction and events are appropriately aggregated or disaggregated
and clearly described and related disclosures are relevant and understandable in the
context of the requirements of the applicable reporting framework

Account Balances (Related Disclosures)

• Existence - assets, liabilities, and equity interests exists
• Rights & Obligations – the entity holds or controls the rights to assets, and liabilities
are obligations of the entity
• Completeness – all assets, liabilities, equity interest that should have been recorded
have been recorded, and all related disclosures that should have been included in
the financial statements have been included
• Classification – assets, liabilities, and equity interests have been recorded in the
proper accounts
• Accuracy, Valuation, & Allocation – assets, liabilities, and equity interests have been
included in the financial statements at appropriate amounts, and any resulting
valuation or allocation adjustments have been appropriately measured and
described
• Presentation – assets, liabilities, and equity interest are appropriately aggregated or
disaggregated and clearly described, and related disclosures are relevant and
understandable in the context of the requirements of the applicable financial
reporting framework
❖ Code of Professional Ethics
Ethical principles governing the auditor’s professional responsibilities are:
a. Independence
b. Integrity
c. Objectivity
d. Professional competence and due care
e. Confidentiality
f. Professional behavior; and
g. Technical standards

Code of Professional Ethics 2018

- Includes safeguards which are “actions, either individually or in combination,
that a Public Accountant takes that effectively reduce threats to compliance with
the fundamental principles to an acceptable level.”
- It is no longer a valid notion that all threats can be addressed by the application
of safeguards. The enhanced conceptual framework clarifies that in certain
circumstances, the public accountant may not have any other option but to
decline, or end the specific professional activity, or service
- It emphasizes that threats are addressed either by eliminating the
circumstances creating the threats; applying safeguards where they are available
or capable of reducing the identified threats to an acceptable level; or by
declining or ending the specific professional activity or services
 LS 1.20
PSA 120: FRAMEWORK OF THE PHILIPPINE STANDARDS OF AUDITING
Fundamentals of Auditing and Assurance Services

❖ International Harmonization of Audit Standards

• International Auditing and Assurance Standards Board (IAASB)
o Develops International Standards on Auditing (ISAs) and International Standards
Review Engagements (ISREs)
o Develops International Standards on Assurance Engagements (ISAEs)
o Develops related practice statements (IAASB Handbook, 2020 vol 1 & 2)

❖ In the Philippine Context

▪ Before the creation of the Auditing and
Assurance Standards Council (AASC) in
December 2005, the Auditing Standards and
Practices Council (ASPC) was responsible for
the promulgation of auditing standards,
practices, and procedures, considered as
Generally Accepted Auditing Standards
(GAAS) in the Philippines.
▪ The AASC shall have 18 regular members with
a term of 3 years, renewable for another term

❖ Generally Accepted Auditing Standards (GAAS)

• The examination is to be performed by person or persons having

General adequate technical training and proficiency as an auditor
Standards • In all matters relating to an engagement, an independence in mental
attitude is to be maintained by the auditor
T-I-P • Due professional care is to be exercised in the perfrormance of the audit
and in the preparation of the report

• The work is to be adequately planned and assistants, if any, are to be

properly supervised
Standards of • There is to be proper study and evaluation of existing internal control as a
Fieldwork basis for reliance thereon and for the dtermination of the resultant extent of
the tests to which auditing procedures are to be restricted
P-I-E •Sufficient competent evidential matter is to be obtained through
inspection, observation, inquiries and confirmation to afford a reasonable
basis for an opinion regarding the F/Ss under examination
 •The report shall state whether the financial statements are presented in
accordance with generally accepted accounting principles
•The report shall identify those circumstances in which principles have not
Standards of been consistently observed in the current period in relation to the preceding
Reporting period
•Informative disclosures are to be regarded as reasonably adequate unless
otherwise stated in the report
•The report shall either contain an expression of opinion regarding the
G-I-D-O 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, where 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 and the degree of the responsibility he is taking.

❖ AASC Pronouncements

FRAMEWORK FOR ASSURANCE RELATED

ENGAGEMENTS SERVICES

Other Assurance Agreed Upon Compilation

Audit Review
Engagements Procedures Engagement

Standards 1PSAs 2PSREs 3PSAEs 4PSRSs

Practice
PAPSs PREPs PAEPSs PRSPSs
Statements

Engagement AASC Pronouncements

1
Philippine Standards on Auditing (PSAs) & Philippine Auditing & Practice Standards
Audit - Audit of Historical Financial Statements

2
Philippine Standards on Related Engagements (PSREs) & Practice Standards
Review - Review of Historical Financial Statements

3
Philippine Standards on Assurance Engagements (PSAEs) & Practice standards
Other
- Assurance engagements dealing with subject matters
Assurance
other than historical financial information
Engagements
4
Philippine Standards on Related Services (PSRSs) & Practice Standards
Related Services - Compilation, other related services

Philippine Standards on Quality Control

Quality Control - All services covered by engagement standards
 ❖ Financial Reporting Framework (PSA 120, par. 3)

Financial statements are ordinarily prepared and presented annually and are directed toward the
common information needs of a wide range of users. Many of 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 their 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.

❖ Framework for Auditing & Related Services

Expounded…

Related Services
Auditing
Review Agreed-Upon Procedures Compilation
In a For agreed-upon
In an audit engagement,
Nutshell In a review procedures, as the In a compilation
the auditor provides a
engagement, the auditor simply provides a engagement,
high level of assurance,
auditor provides a report of the factual although the users
but not absolute level of
moderate level of findings, no assurance is of the compiled
assurance that the
assurance that the expressed. Instead, users information derive
information subject to
information subject to of the report assess for some benefit from
audit is free of material
review is free of themselves the the accountant's
misstatement. This is
material misstatement. procedures and findings involvement, no
expressed positively in
This is expressed in the reported by the auditor assurance is
the audit report
form of negative and draw their own expressed in the
assurance. conclusions from the report.
auditor's work.
 • 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
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
whether, on the basis of
other information
prepared in accordance
with appropriate criteria
(par. 20)
• In forming the audit
opinion, the auditor
obtains sufficient
Objective
appropriate audit evidence
to be able to draw
financial statements are
conclusions on which to
base that opinion (par. 21)
• The auditor’s opinion
enhances the credibility of
financial statements by
providing a high, but not similar objective applies
absolute, level of
assurance. Absolute
assurance in auditing is information prepared in
not attainable as a result
of such factors as the
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. (par. 22)
In a compilation
engagement, the
accountant is
engaged to use
accounting
expertise as
opposed to
auditing expertise
to collect, classify
and summarize
The objective of a financial
review of financial information. This
In an engagement to
statements is to enable ordinarily entails
perform agreed-upon
an auditor to state reducing detailed
procedures, an auditor is
data to a
engaged to carry out
procedures which do manageable and
those procedures of an
not provide all the understandable
audit nature to which the
evidence that would be form without a
auditor and the entity
required in an audit, requirement to test
and any appropriate third
anything has come to the assertions
parties have agreed and
the auditor's attention underlying that
to report on factual
that causes the auditor information. The
findings. The recipients of
to believe that the procedures
the report must form
employed are not
their own conclusions
not prepared, in all designed and do
from the report by the
material respects, in not enable the
auditor. The report is
accordance with an accountant to
restricted to those parties
identified financial express any
that have agreed to the
reporting framework. A assurance on the
procedures to be
financial
performed since others,
to the review of information.
unaware of the reasons
financial or other However, users of
for the procedures, may
the compiled
misinterpret the results.
accordance with financial
appropriate criteria. information derive
some benefit as a
result of the
accountant's
involvement
because the service
has been
performed with
due professional
skill and care.
❖ Auditor’s Association with Financial Information (PSA 120; parag. 19)

An auditor is associated with financial information when the auditor attaches a 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
auditor's name in connection with the information. The auditor may also believe it necessary to take other
action, for example, to seek legal advice.
 LS 1.30
PSA 200: OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR
AND THE CONDUCT OF AUDIT IN ACCORDANCE WITH PSA
Fundamentals of Auditing and Assurance Services

❖ Scope of PSA 200 (200.1)

- Establishes the independent auditor’s overall responsibilities when conducting audit of financial
statements in accordance with PSAs
- Sets out overall objectives of the independent auditor
- Explains the nature and scope of an audit to enable the independent auditor to meet the objectives
- Explains the scope, authority, and structure of the PSA
- Includes requirements establishing the general responsibilities of the independent auditor
applicable in all audits and obligation to comply the PSAs

❖ Purpose of An Audit (200.3)

• To enhance the degree of confidence of intended users in the financial statements
- 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 framework
- In the case of most general purpose frameworks, the opinion is on whether the
financial statements are presented fairly, in all material respects in accordance with
the framework
- An audit is conducted in accordance with PSAs and relevant ethical requirements
enables the auditor to form an opinion

❖ Scope of an Audit
• The scope of the auditor’s work and the
opinion provided are usually confined to
whether the financial statements are
prepared, in all material respects, in
accordance with the applicable financial
reporting framework. As a result, an
unmodified auditor’s report does not assure
the future viability of the entity, nor the
efficiency or effectiveness with which
management has conducted the affairs of the entity
o Any extension of this basic audit responsibility, such as that required by local laws or securities
regulations, would require the auditor to undertake further work and to modify or expand the
auditor’s report accordingly
❖ Audit of Financial Statements (PSA 200.4)
• Financial Statements subject to audit are those prepared and presented by management of
the entity with the oversight of TCWG1.
o PSAs do not impose responsibilities on management or TCWG and do not override laws and
regulations that govern their responsibilities.
o However, an audit in accordance with PSAs is conducted on the premise that management and
where appropriate, TCWG have responsibilities that are fundamental in the conduct of the
audit

PSA 200 A2.b

An audit in accordance with PSAs is conducted on the premise that management and,
where appropriate, those charged with governance have responsibility: To provide the auditor
with:
(i) All information, such as records and documentation, and other matters that are
relevant to the preparation and presentation of the financial statements;
(ii) Any additional information that the auditor may request from management and,
where appropriate, those charged with governance; and
(iii) Unrestricted access to those within the entity from whom the auditor determines
it necessary to obtain audit evidence.

PSA 200. 7 & 8

The PSAs require that the auditor exercise professional judgment and maintain professional
skepticism throughout the planning and performance of the audit and, among others:
▪ Identify risk of material misstatements (RMM), whether due to fraud or error, based on
an understanding of the entity and its environment, including the entity’s internal
control
▪ Obtain sufficient appropriate audit evidence about whether material misstatements
exist, through designing and implementing appropriate responses to the assessed risks
▪ Form an opinion on the financial statements based on conclusions drawn from the audit
evidence obtained

Important Points:
▪ The 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.
▪ The form of opinion on the financial statements is based on the conclusions drawn
from the audit evidence obtained
▪ The form of opinion expresses by the auditor will depend upon the applicable
financial reporting framework and applicable laws and regulations

1
TCWG – those charged with governance
❖ Basis of Auditor’s Opinion (PSA 200.5)
• PSAs require the auditor to obtain a reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud and error.
- Reasonable assurance is a high level of assurance. It is obtained when the auditor
has obtained sufficient appropriate evidence to reduce audit risk to an acceptably
low level.
o 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 and bases the auditor’s opinion being persuasive rather than
conclusive.

❖ Concept of Materiality (PSA 200. 6)

• The concept of materiality is applied both in planning and performing the audit, and
evaluating the effect of identified misstatements on the audit and of uncorrected
misstatements, if any, on the financial statements.
• 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 financial
statements
▪ Size and/or nature of misstatements

❖ Overall Objectives of the Auditor (PSA 200. 11 & 12)

In conducting an audit of financial statements, the overall objectives of the auditor are:
• 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.
• To report on the financial statements, and communicate as required by the PSAs, in
accordance with the auditor’s findings.
o When reasonable assurance cannot be obtained and a qualified opinion in the auditors 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.

❖ Ethical Requirement Relating to an Audit of Financial Statements (PSA 200.14)

14. The auditor shall comply with relevant ethical requirements, including those pertaining
to independence, relating to financial statement audit engagements.
 ➢ Code of Ethics for Professional Accountants of the Philippines
Integrity
Objectivity
Professional Competence
Confidentiality
Professional Behavior
o Philippine Standard on Quality Control (PSQC) deal with the firm’s responsibilities to establish
and maintain its system of quality control for audit engagements

❖ Professional Skepticism (PSA 200 15 & A18)

15. The auditor shall plan and perform an audit with professional skepticism recognizing that
circumstances may exist that cause the financial statements to be materially misstated.

A18. Professional skepticism includes being alert to, for example:

• 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 addition to those required by
the PSAs.

❖ Professional Judgment (PSA 200. 16 & A23)

16. The auditor shall exercise professional judgment in planning and performing an audit of
financial statements.

A23. Professional judgment is essential to the proper conduct of an audit. This is because
interpretation of relevant ethical requirements and the PSAs and the informed decisions
required throughout the audit cannot be made without the application of relevant
knowledge and experience to the facts and circumstances. Professional judgment is
necessary in particular regarding decisions about:
• Materiality and audit risk.
• The nature, timing, and extent of audit procedures used to meet the requirements of
the PSAs and gather audit evidence. Evaluating whether sufficient appropriate audit
evidence has been obtained, and whether more needs to be done to achieve the
objectives of the PSAs and 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.
❖ Important Terminologies (see PSA 200.13 for definitions)

▪ Applicable Financial Reporting ▪ Management

Framework ▪ Misstatement
▪ Audit Evidence ▪ Premise
▪ Audit Risk ▪ Professional Judgment
▪ Auditor ▪ Professional Skepticism
▪ Detection Risk ▪ Reasonable Assurance
▪ Financial Statements ▪ Risk of Material Misstatement
▪ Historical Financial Information ▪ Those Charged With Governance

❖ Failure to Achieve an Objective (PSA 200.24)

- Is a matter of auditor’s professional judgment
- The judgment is based in the results of audit procedures performed after complying with the
PSA requirements, evaluation of whether sufficient appropriate audit evidence were
obtained and whether more needs to be done in that particular circumstances to achieve the
audit objectives

24. If an objective in a relevant PSA cannot be achieved, the auditor shall evaluate whether this
prevents the auditor from achieving the overall objectives of the auditor and thereby requires
the auditor, in accordance with the PSAs, to modify the auditor’s opinion or withdraw from the
engagement. Failure to achieve an objective represents a significant matter requiring
documentation in accordance with PSA 230 (Redrafted).

❖ Considerations for Small Entities (PSA 200. A64)

For purposes of specifying additional considerations to audits of smaller entities, a “smaller

entity” refers to an entity which typically possesses qualitative characteristics such as:
(a) Concentration of ownership and management in a small number of individuals (often a
single individual – either a natural person or another enterprise that owns the entity
provided the owner exhibits the relevant qualitative characteristics); and
(b) One or more of the following:
(i) Straightforward or uncomplicated transactions;
(ii) Simple record-keeping;
(iii) Few lines of business and few products within business lines;
(iv) Few internal controls;
(v) Few levels of management with responsibility for a broad range of controls; or
(vi) Few personnel, many having a wide range of duties.
These qualitative characteristics are not exhaustive, they are not exclusive to smaller entities,
and smaller entities do not necessarily display all of these characteristics.
 LS 1.40
THE PUBLIC ACCOUNTING PROFESSION ENVIRONMENT
RA 9298. ACCOUNTACY ACT 2004
Fundamentals of Auditing and Assurance Services

❖ Philippine Accounting History

Year Description
Accounting with our trading partners, the Malays, Chinese & Indians were as
AD 980’s simple as exchanging cash or goods

The British colonizers established the first accounting firms

1700s
Americans greatly influenced the accounting practice
1890s
The Accountancy Act 1923 was passed, and the first CPA certificates were
1923 issued.

PICPA was established

1929
The Accountancy Act 1967 was passed.
1967
The Revised Accountancy Law 1975 was passed. PD 692
1975
The Philippine Accountancy of 2004 replaced the Revised Accountancy Law. RA
2004
9298

❖ Board of Accountancy
- The 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
changes and developments in the accountancy sector, locally and globally, that have
arisen. Thus, the need for the revision of the archaic law of accountants.

❖ RA 9298. Philippine Accountancy Act of 2004

ARTICLE 1. TITLE, DECLARATION OF POLICY, OBJECTIVE, AND SCOPE OF PRACTICE
Section 2. Declaration of Policy. The State shall develop and nurture competent, virtuous,
productive and well-rounded professional accountants.
- Through inviolable, honest, effective, and credible licensure examinations
- Through regulatory measures, programs and activities that foster their professional
growth and development

Section 3. Objectives. This Act shall provide for and govern:

a. Education. The standardization and regulation of accounting education
b. Examination. The examination for registration of certified public accountants; and
c. Regulation. The supervision, control, and regulation of the practice of accountancy in
the Philippines.
 ➢ Republic Act 9298. Six Areas of Revisions:
1. Structural
2. Mandate of the Accountancy Regulatory Office and the BOA
3. Practice of Accountancy
4. Accountancy Examination and Program Matters
5. Special Provisions
6. Penalties and Sanctions

OVERVIEW OF SETTING UP AN ACCOUNTING PUBLIC PRACTICE

o Comply with Continuing Professional Development (CPD) Requirements
• Graduate with a degree in Bachelor of Science in Accountancy
• Successfully pass the CPA Board Examination: registration and license to practice
• Obtain meaningful experience (minimum 3 yrs.)
• Secure accreditation from BOA/PRC and, if necessary, including from BIR, BSP, IC & CDA
• Perform services in accordance with professional standards, ethical, legal and regulatory
requirements

Section 4. Scope of Practice. The practice of accountancy shall include, but not limited to the
following:

(a) Practice of Public Accountancy – shall constitute in a person, be it his/her individual capacity, or as
a partner or as a staff member in an accounting or auditing firm, holding out himself/herself as one skilled in the
knowledge, science and practice of accounting, and as a qualified person to render professional services as a
certified public accountant; or offering or rendering, or both, to more than one client on a fee basis or otherwise,
services such as the audit or verification of financial transaction and accounting records; or the preparation,
signing, or certification for clients of reports of audit, balance sheet, and other financial, accounting and related
schedules, exhibits, statements or reports which are to be used for publication or for credit purposes, or to be
filed with a court or government agency, or to be used for any other purpose; or the design, installation, and
revision of accounting system; or the preparation of income tax returns when related to accounting procedures;
or when he/she represents clients before government agencies on tax and other matters related to accounting
or renders professional assistance in matters relating to accounting procedures and the recording and
presentation of financial facts or data.

(b) Practice and Commerce and Industry – shall constitute in a person involved in decision making
requiring professional knowledge in the science of accounting, or when such employment or position requires
that the holder thereof must be a certified public accountant.

(c) Practice in Education/Academe – shall constitute in a person in an educational institution which

involve teaching of accounting, auditing, management advisory services, finances, business law, taxation and
other technically related subjects: Provided that members of the Integrated Bar of the Philippines may be
allowed to teach business law and taxation subjects.

(d) Practice in the Government – shall constitute in a person who holds or is appointed to, a position in
an accounting professional group in government or in a government-owned and/or controlled corporation
including those performing proprietary functions, where decision making requires professional knowledge in
the science in accounting, or where a civil service eligibility as a certified public accountants is a prerequisite.
ARTICLE 2. PROFESSIONAL REGULATORY BOARD OF ACCOUNTANCY
Regulatory Framework

ARTICLE 3. EXAMINATION, REGISTRATION, AND LICENSURE

BSA Curriculum
- The BSA Curriculum is designed to support
aspiring professional accountants to develop
the appropriate entry-level technical
competence, professional skills, values, ethics
and attitudes to successfully complete their
studies and pass the CPALE

CPALE: Syllabus, Topics, and Schedule

I. Auditing
II. Management Advisory Services
III. Taxation
IV. Regulatory Framework for Business Transactions
V. Financial Accounting and Reporting
VI. Advanced Financial Accounting and Reporting (AFAR)

CPALE Syllabus: Auditing (Effective October 2022 Examination)

 Table of Specifications (TOS) of the 6 New Subjects of BLECPA 1
1. To include the topic Effective Communication to Stakeholders in all the six (6) subjects of
the BLECPA; and
2. To include the topics Code of Ethics for Professional Accountants in the Philippines, RA
9298, and its implementing rule and regulations in the subject Auditing

Practical/Practice/
Subject Theoretical
Competence
Financial Accounting and Reporting 30% 70%
Advanced Financial Accounting and Reporting 30% 70%
Management Advisory Services 30% 70%
Auditing 50% 50%
Taxation 30% 70%
Regulatory Framework for Business Transaction 70% 30%

Section 14. Qualification of Applicants for Examination. Any person applying for examination shall
establish the following requisites to the satisfaction of the Board that he/she:
(a) is a Filipino citizen;
(b) is of good moral character;
(c) is a holder of the degree of Bachelor of Science in Accountancy conferred by a school,
college, academy or institute duly recognized and/or accredited by the CHED or other
authorized government offices; and
(d) has not been convicted of any criminal offense involving moral turpitude.

Section 16. Rating-in the Licensure Examination. To be qualified as having passed the licensure
examination for accountants, a candidate must obtain a general average of seventy-five percent (75%),
with no grades lower than sixty-five percent (65%) in any given subject. In the event a candidate
obtains the rating of seventy-five percent (75%) and above in at least a majority of subjects as provided
for in this Act, he/she shall receive a conditional credit for the subjects passed: Provided, That a
candidate shall take an examination in the remaining subjects within two (2) years from the preceding
examination: Provided, further, That if the candidate fails to obtain at least a general average of
seventy-five percent (75%) and a rating of at least sixty-five percent (65%) in each of the subjects
reexamined, he/she shall be considered as failed in the entire examination.

Section 17. Report of Ratings. The Board shall submit to the Commission the ratings obtained by
each candidate within ten (10) calendar days after the examination, unless extended for just cause
Upon the release of the results of the examination, the Commission shall send by mailing the rating
received by each examinee at his/her given address using the mailing envelope submitted during the
examination.

Section 18. Failing Candidates to Take Refresher Course. Any candidate who fails in two (2)
complete Certified Public Accountant Board Examinations shall be disqualified from taking another
set of examinations unless he/she submits evidence to the satisfaction of the Board that he/she
enrolled in and completed at least twenty-four units of subject given in the licensure examination.

1
BLECPA : Board Licensure Examination for Certified Public Accountants
 For purposes of this Act, the examination in which the candidate was conditioned together with
the removal examination on the subject in which he/she failed shall be counted as one complete
examination.

OTHER LEGAL AND REGULATORY REQUIREMENTS

I. Oath (Sec. 19) – successful candidate of CPALE shall be required to take an oath of profession
before any member of the Board of Accountancy
II. Issuance of Certificates of Registration and Professional Identification Card (Sec. 20) – it
bears the registration number, date of issuance, expiry date, duly signed by the chairperson
of the Commission and renewable every 3 years
III. Identification of Certificate of Registration, Identification Card and Professional Tax Receipt
(PTR)
IV. For CPAs in Public Practice an Accreditation from the Board of Accountancy is required.
Renewal every 3 years.

ARTICLE 4. PRACTICE OF ACCOUNTANCY

ARTICLE 5. PENAL AND FINAL PROVISIONS

❖ Auditing Firms Organized as Sole Proprietorship or Partnership

• SGV & CO. (Partner of Ernst & Young)
• Navarro Amper & Co. (Partner of Deloitte Touche Tohmatsu Ltd.)
• Isla Lipana & Co. (Partner of PWC)
• R.G. Manabat & Co. (Partner of KPMG)
• Punongbayan & Araullo (Partner of Grant Thornton International Ltd.)
• Roxas Cruz Tagle & Co. (Partner of BDO Global)

❖ Audit Team
• Audit Partner – concerned about the overall quality of each audit.
- Ultimate responsible for resolving technical matters
- Plan and review all phases of an audit engagement
- Sign the audit report
- Approve the firm’s billing to the client
- Obtain/establish contracts with clients
- Determine office operating policies

• Audit Manager/ Supervisor – administers important aspects of audit engagements,

scheduling the audit work to be done with client, assigning work to audit staff, supervising
staff, and reviewing staff work
- Act as a liaison officer between partners and other members of the staff
- Discuss with the client, problems regarding the audit
- Exercise direct supervision on seniors in charge of specific audit
- Review working papers and drafts of audit report
- Discuss reports and results of audit with clients
- Take direct charge of training programs
 • In-Charge (Senior) Auditor – prepares the audit program for an engagement subject, to
review by the partner, principal, or supervisor
- Assigns particular phases of the audit work to staff and to exercise
direct supervision over them
- Performs certain audit procedures requiring skill and experience
▪ Compares the current period’s operating results with that of
the preceding year/s for the purpose of noting and investigating
any unusual variations
- Takes up with the client or with the partner or principal, problems or
questions that arise in the course of the audit
- Assembles the working papers in an audit, and prepare a draft of the
report and financial statements for review and approval by the partner
or supervisor
- Reviews the articles of incorporation, by laws, and other non-financial
records
- Verifies the assets and liabilities and the basis of the valuation
- Examines the adequacy of allowances for depreciation, bad debts,
provision for income taxes, etc.

• Staff Auditor – performs various audit procedures and gather audit evidence to use as a
basis for the audit reports
- Performs procedures that relate to a variety of aspects of a client’s
activities
- prepares schedules and reports of findings
- Works on tax returns
- Checks the accuracy of findings and extension on books of accounts and
other records
- Checks the postings of entries from the journal to the ledger
- Examines the vouchers supporting minor adjustments
- Serves as an assistant

❖ Prohibited Professional Services

In summary, Sarbanes-Oxley prohibits professional services firms from performing any client services
for audit clients in which the auditors may find themselves making management decisions or auditing
their own firm’s work.
Specifically, Sarbanes-Oxley prohibits professional service firms from providing any of the following
services to an audit client:
1. Bookkeeping and related services
2. Design or implementation of financial information systems
3. Appraisal or valuation services
4. Actuarial services
5. Internal audit outsourcing
6. Management or human resources services
7. Investment or broker/dealer services
8. Legal and expert services (unrelated to the audit)
Professional firms may provide client tax services (with some restrictions) and other non-prohibited
services to audit clients if the company’s audit committee has approved them in advance.
 L.S. 1.50
Overview of Risk-Based Audit Process
Fundamentals of Auditing and Assurance Services

❖ Overview of the Financial Statement Auditing Process

❖ Risk
• Risk - a concept used to express an uncertainty or what can go wrong about events and/or
their outcomes that could have a material effect on the entity
- the possibility of an event occurring that will have an impact on the achievement of
the entity’s objective. It is measured in terms of: impact and likelihood

Factors Affecting Impact of Risk Factors Affecting Likelihood of Risk

• Materiality (amount of loss)
• Potential reputation or brand image
• Importance of the related objective to
entity’s mission
• Duration and/or pervasiveness of the
event
• Recovery cost
• Probability estimates based on history or
cycles
• Complexity of activities
• Change or stability (employee turnover or
new laws)
• Control environment (integrity and ethics)
• Control process effectiveness

Entity Level
Risk Appetite
The amount of risk that an entity is prepared to accept, tolerate or be exposed to at any
point in time.
Guidepost/level of risk/acceptable balance
Risk Response
The decision to accept, avoid, reduce, or share a risk
 Risk Tolerance
The acceptable variation relative to performance to the achievement of objectives

Relationship Among Risks

Four Critical Components of Risks

• Audit risk – the risk that an auditor may give an unqualified opinion on financial statements that
are materially misstated
• Engagement risk – the economic risk that a CPA firm is exposed to simply because it is
associated with a particular client including loss of reputation, inability of the client to pay the
auditor, or financial loss because management is not honest and inhibits the audit process.
o Audit risk and Engagement risk are affected by financial reporting risk & business risk
• Financial Reporting risk – relates directly to the recording of transactions and the presentation
of financial data in an organization’s financial statements
• Business risk – those risks that affect the operations and potential outcomes of organizational
activities
o Financial Reporting risk and Business risk originate with the client and its environment

Relationship Between Engagement Risk and Audit Risk

Engagement Risk
High Moderate Low
Do not accept client Ste very low Set within professional standards
but can be higher than companies
with higher engagement risk (5%)
Audit Risk
Higher levels of audit Confidence level Auditor is willing to take a 5%
risk are appropriate for = 99% chance of issuing an unqualified
client with lower levels opinion on materially misstated
of engagement risk financial statements

Risk Management
- Is the process to identify, assess, manage, and control potential events or situations to
provide reasonable assurance regarding the achievement of the entity’s objectives
- Is an ongoing process that helps an entity to anticipate negative events, develop a
framework for effective decision-making, and profitably deploy the entity’s resources
❖ Risk-Based Audit Approach Roadmap
▪ Begins with an assessment of the types and likelihood of misstatements in account balance
and then adjusts the amount and type of audit work, to the likelihood of material
misstatements occurring in account balances.
Under this approach, the auditor performs the following:
1. Identification of the client’s strategy and the processes for developing that strategy
2. Examination of the core business process and resource management
3. Identification for each of the key process (as well as sub-processes the objectives,
inputs, outputs, systems and transactions)
4. Assessment of the risks that the processes will not meet the goals and controls related
to those risks

Entity’s Objective: Prepare financial statements that are not materially misstated

Auditor’s Objective: Determine whether entity’s financial statements are free from material
misstatement
Factors to Consider in Implementing the Audit Risk Model
• Existence of large non-routine transactions
• Matters requiring judgment or management intervention
• Potential for Fraud
• High-risk activities

Risk Based Audit Process Overview

Phases
- Assess predictions for an audit
- Develop common understanding of the
audit engagement with the client
- Identify and assess risks of material
Phase 1: misstatement
Risk Assessment - Respond to identify risks of material
misstatement
▪ Performing risk assessment procedures
to identify and assess the risk of material
misstatement in financial statements
- Select controls to test, if applicable
- Perform tests of controls, if applicable
- Consider the results of tests of controls, if
applicable
Phase 2: - Perform substantive tests
Risk Response ▪ Designing and performing further audit
procedures that respond to identified
and assessed risks of material
misstatement at both the financial
statements and assertion levels
- Complete review and communication
activities
- Determine the type(s) of opinion(s) to
issue
Phase 3:
▪ This involves:
Completing the Audit and Making Reporting
o Forming an opinion based on the
Decisions
audit evidence obtained; and
o Preparing and issuing a report that
is appropriate to the conclusions
reached
 Phase 1: Risk Assessment
- Should occur at the business process level as well as the entity level

A simple risk assessment process can be used in any size of firm, even in sole proprietorship. It consists
of the following activities…
Phase 2: Risk Response

Phase 3: Reporting

Benefits of the Risk-Based Audit

Benefits Description

Because risk assessment procedures do not involve the detailed testing of

transactions and balances, they can be performed well before the period
end, assuming no major operational changes are anticipated. This can help
in balancing the workload of audit staff more evenly throughout the period.
Time Flexibility When
It may provide the client with time to respond to identified (and
Audit Work Needs to
communicated) weaknesses in internal control and other requests for
Be Performed
assistance before the commencement of period-end audit fieldwork.
However, where interim financial information is not readily available, the
analytical risk assessment procedures may have to be performed at a later
date
 By understanding where the risks of material misstatement can occur in
Audit Team’s Effort financial statements, the auditor can direct the audit team’s effort toward
Focused on Key Areas high-risk areas and perhaps reduce work in lower-risk areas. This will also
help to ensure that audit staff resources are used effectively

Audit procedures Further audit procedures are designed to respond to assessed risks.
Focused on Specific Consequently, tests of details that only address risks in general terms may
Risks be significantly reduced or even eliminated

The required understanding of internal control enables the auditor to make

informed decisions on whether to test the operating effectiveness of
Understanding of
internal control. Tests of controls (for which some controls may only require
Internal Control
testing every three years) will often result in much less work being required
than performing extensive test of details

The improved understanding of internal control may enable the auditor to

Timely identify weaknesses in internal control (such as in the control environment
Communication of and general IT controls) that were not previously recognized.
Matters of Interest to Communicating these weaknesses to management on a timely basis will
Management enable them to take appropriate action, which is to their benefit. This may
also save time in performing the audit

Limitation of the Audit Risk Model

• Inherent Risk : difficult to formally assess
• Model Risk : not independent; the model treats each risk component as separate and
independent when in fact the components are not independent
• Audit Risk : judgmentally determined
• Audit Technology : not fully developed that each component of the model can be
accurately assessed