Professional Documents
Culture Documents
Auditing Theory Jekyll Salosagcol Summary Compress
Auditing Theory Jekyll Salosagcol Summary Compress
AUDIT – AN OVERVIEW
THE PROFESSIONAL STANDARDS
THE AUDITOR’S RESPONSIBILITY
THE AUDIT PROCESS – ACCEPTING AN ENGAGEMENT
AUDIT PLANNING
CONSIDERATION OF INTERNAL CONTROL
AUDITING IN AN COMPUTERIZED ENVIRONMENT
PERFORMING SUBSTANTIVE TESTS
AUDIT SAMPLING
COMPLETING THE AUDIT
AUDIT REPORTS ON FINANCIAL STATEMENTS
ASSURANCE AND RELATED SERVICES
THE CODE OF ETIHICS AND REPUBLIC ACT 9298
AC17&18: ASSURANCE PRINCIPLES, PROFESSIONAL ETHICS AND GOOD GOVERNANCE REVIEWER
ALAMO, MARK JOSEPH S.
AUDIT – AN OVERVIEW
“An audit is a systematic process of objectively obtaining and evaluating evidence regarding assertions about
economic actions and events to ascertain the degree of correspondence between the assertions and established
criteria and communicating the results to interested users.” – AASC
Types of Audit
1. Financial Statement Audit – audit conducted to determine whether the FSs of an entity are fairly presented
with an identified financial reporting framework. (Conducted by EXTERNAL AUDITORS)
2. Compliance Audit – a review of an organization’s procedures to determine whether the organization adhered
to specific procedures, rules, contracts, or regulations. (Conducted usually by GOVERNMENT AUDITORS)
3. Operational Audit – study of a specific unit of the organization for the purpose of measuring its performance.
(Conducted usually by INTERNAL AUDITORS)
MANAGEMENT is responsible for preparing and presenting the FSs in accordance with the financial reporting
framework.
The AUDITOR’S RESPONSIBILITY is to form and express an opinion on the FSs based on his audit.
An audit conducted with PSA is designed to provide only REASONABLE ASSURANCE that the FSs taken as a
whole are free from material misstatements.
Limitations of an Audit
1. Conflict of Interest
2. Expertise
3. Remoteness
4. Financial Consequences
Theoretical Framework of Auditing (Assumptions or Ideas that Support the Audit Function)
It represents measures of the quality of auditor’s performance. These standards should be looked as MINIMUM
STANDARD of performance that auditors should follow.
Opinion
The Philippine Standard on Auditing (PSA) establishes the independent auditor’s overall responsibilities when
conducting an audit of financial statements in accordance with PSAs. These are issued by AASC as interpretations to
GAAS.
Practice Statements – are additions to these standards to provide practical assistance to auditors in implementing the
standards and to promote good practice in the accountancy profession.
Quality controls are policies and procedures adopted by CPAs to provide reasonable assurance of conforming to
professional standards in performing audit and related services.
The government thru the Professional Regulatory Board of Accountancy (BOA) has required all CPA firms and individual
CPA firms and individual CPAs in public practice to obtain a certificate of accreditation to practice public accountancy.
Quality Review Committee (QRC) – created by PRC which shall conduct a quality review on applicants for registration to
practice public accountancy.
AC17&18: ASSURANCE PRINCIPLES, PROFESSIONAL ETHICS AND GOOD GOVERNANCE REVIEWER
ALAMO, MARK JOSEPH S.
AUDITOR’S RESPONSIBILITY
The auditor’s responsibility is to design the audit to provide reasonable assurance of detecting material
misstatements in the FSs. These misstatements may emanate from:
Error
Fraud
Noncompliance with Laws and Regulations
FRAUD – refers to intentional act by one or more individuals among management, employees, or third parties which results in
misrepresentation of financial statements.
Types of Fraud:
1. Management Fraud/ Fraudulent Financial Reporting – involves intentional misstatements or omissions of amounts
or disclosures, usually done by members of management or those charged with governance.
Examples: manipulation of documents or records, misrepresentation of effects of transactions, recording of
transactions w/o substance, intentional application of accounting policies
2. Employee Fraud/ Misappropriation of assets – fraud that is accompanied by false or misleading records in order to
conceal the fact that assets are missing.
Examples: embezzling receipts, stealing entity’s assets, lapping of AR
AUDITOR’S RESPONSIBILITY:
The auditor is not and cannot be held responsible for the prevention of fraud and error. The auditor’s responsibility is to
design the audit to obtain reasonable assurance that the FS are free from material misstatements whether caused by error or
fraud.
1. Obtain a general 4. When the auditor is aware 6. The auditor should obtain a written
understanding of the legal concerning instance of representation from the client’s
and regulatory framework noncompliance, evaluate the management.
applicable to entity possible effect on the FS.
2. Design procedures to help 7. When the auditor believes that there is
identify instances of 5. When the auditor believes noncompliance, the auditor should request
noncompliance with laws and there maybe noncompliance, the the mgmt. to revise the FS. Otherwise, a
regulations auditor should document the qualified or adverse opinion will be issued.
3. Design audit procedures to findings, discuss them with
mgmt. and consider the 8. If a scope limitation has precluded the
obtain sufficient appropriate
implication on other aspects of auditor from obtaining sufficient appropriate
audit evidence about
evidence, the auditor should express a
compliance with laws and the audit.
qualified opinion or a disclaimer of opinion.
regulations
Auditors are primarily concerned with the noncompliance what will have a direct and material effect in the FS.
Noncompliance may involve conduct designed to conceal it such as collusion, forgery, senior 5mgmt. override of
controls, failure to record transactions, or intentional misrepresentations being made to auditor.
AC17&18: ASSURANCE PRINCIPLES, PROFESSIONAL ETHICS AND GOOD GOVERNANCE REVIEWER
ALAMO, MARK JOSEPH S.
ISSUING A REPORT
Forms a conclusion on FS (in
COMPLETING THE AUDIT
OVERVIEW OF THE the form of opinion)
AUDIT PROCESS Satisfy that the evidence gathered is consistent
with auditor’s report.
PERFORMING SUBSTANTIVE TESTS
ACCEPTING AN ENGAGEMENT
In deciding whether to accept or reject an engagement, the firm should consider:
1. Competence – acquired through a combination of education, training, and experience. The auditor should
obtain a preliminary knowledge of client’s business and industry to determine whether the auditor has the
degree of competence required by the engagement.
2. Independence – the auditor should consider whether there are threats to audit team’s independence and
objectivity and, if so, whether adequate safeguards can be satisfied.
3. Ability to serve the client properly – An engagement should not be accepted if there are no enough qualified
personnel to perform the audit. PSA 220 suggests that the audit work should be assigned to personnel who have
the appropriate capabilities, competence, and time to perform the audit engagement in accordance with
professional standards.
4. Integrity of the management – PSA 220 requires the firm to conduct a background investigation of the
prospective client in order to minimize the likelihood of association with clients whose mgmt. lacks integrity.
This involves:
Making inquiries of appropriate parties in the business community
Communicating with the predecessor auditor
AUDIT PLANNING
Audit planning – involves developing a general audit strategy and a detailed approach for the expected conduct of
the audit. The auditor’s main objective in planning the audit is to determine the scope of the audit procedures to be
performed.
PSA 315 requires the auditor to obtain sufficient understanding of the entity and its environment including the internal
control. Such understanding involves obtaining knowledge of entity’s:
Industry, regulatory, and other external factors, including financial reporting framework
Nature of the entity
Objectives and strategies and the related risks that may result in material misstatement of FS
Measurement and review of entity’s performance
Internal control
When developing an audit strategy, the auditor must consider carefully the appropriate levels of materiality and audit
risk.
MATERIALITY
“Information is material if its omission or misstatement could influence the economic decision of users”
In designing an audit plan, the auditor should make a preliminary estimate of materiality.
Materiality may be viewed as: (1) the largest amount of misstatement that the auditor could tolerate in the FS
or (2) the smallest aggregate amount that could misstate the FS
There is an inverse relationship between materiality and evidence.
Use of materiality: (1) in the planning stage, to determine the scope of the audit and (2) in the completion
stage, to evaluate the effect of misstatements in the FS
Using materiality levels:
Step 1. Determine the Overall Materiality – Financial Statement Level*
PLANNING STAGE
Step 2. Determine the Tolerable Misstatement – Account Balance Level**
Perform audit procedures
COMPLETION STAGE Step 3. Compare the aggregate amount of misstatements with overall materiality
* Common method of estimating materiality at FS level is statement base (total assets, sales, etc.) x certain %
** Also known as performance materiality. This process is highly subjective and requires the exercise of great deal of
auditor’s judgment
Bases that can be used to determine materiality level: alternative for annual FS if not available – annualized
interim FS, prior year’s FS, budgeted FS for the current year
AC17&18: ASSURANCE PRINCIPLES, PROFESSIONAL ETHICS AND GOOD GOVERNANCE REVIEWER
ALAMO, MARK JOSEPH S.
AUDIT RISK
AUDIT RISK refers to the risk that the auditor gives an inappropriate audit opinion on the FS. This occurs
because the auditor believes that the FS are fairly stated when in fact the FS are materially misstated.
Audit Risk Model
DETECTION RISK is the risk that an auditor’s substantive procedure will not detect a material misstatement.
Detection risk is a function of the effectiveness of the auditor’s substantive procedures.
As the acceptable level of DETECTION RISK DECREASES, the ASSURANCE DIRECTLY PROVIDED FROM
SUBSTANTIVE TESTS INCREASES. Hence, the auditor should design more effective audit procedures in order to
achieve the desired level of assurance.
Unlike inherent and control risk, THE AUDITOR CAN CONTROL THE LEVEL OF DETECTION RISKS by performing
more effective substantive procedures.
Steps in using the audit risk model:
Step 1. Set the desired level of audit risk.*
AUDIT PLANNING
Step 2. Assess the level of inherent risk. **
CONSIDERATION OF INTERNAL CONTROL Step 3. Assess the level of control risk. ***
PERFORMING SUBSTANTIVE TESTS
Step 4. Determine the acceptable level of detection risk. ****
Step 5. Design substantive tests.
* The auditor uses his judgment in determining the risk that he is willing to take of accepting an assertion as fairly stated when in fact is materially misstated.
** Consider the specific factors related to client that may affect the risk of material misstatement for a particular amount. In making this assessment, the auditor will
rely primarily on his knowledge of the client’s business and industry , and the results of his preliminary analytical procedures.
*** Assessment of control risk would involve studying and evaluating the effectiveness of the client’s accounting and internal control systems.
**** The acceptable level of detection risk can be determined as follows: Detection risk = Audit Risk
Inherent risk * Control Risk
Nature Timing Extent
Low Acceptable Level of Detection Risk More effective substantive procedures year-end procedures larger sample size
High Acceptable Level of Detection Risk Less effective substantive procedures Tests at interim smaller sample size
AC17&18: ASSURANCE PRINCIPLES, PROFESSIONAL ETHICS AND GOOD GOVERNANCE REVIEWER
ALAMO, MARK JOSEPH S.
RISK ASSESSMENT PROCEDURES – the procedures performed by auditors to obtain an understanding of the entity and
its environment including its internal control and to assess the risks of material misstatements in the FS. These include:
Inquiries of management and others within the entity
Analytical procedures
Observation and inspection
ANALYTICAL PROCEDURES – involves analysis of significant ratios and trends including the resulting investigation of
fluctuations and relationships that are inconsistent with other relevant information or deviate from particular amounts.
PSA 520 requires the auditor to use analytical procedures in the planning and overall stages of the audit.
Steps in Applying Analytical Procedures
Step 1. Develop expectations regarding FS using:
Prior year’s financial statements
Anticipated results such as budgets and forecasts
Industry averages ( FS of other entities operating w/in the same industry)
Non-financial information
Typical relationships among FS account balances
Step 2. Compare expectations with the FS under audit.
Step 3. Investigate significant unexpected differences (unusual fluctuations) to determine whether FS contain
material misstatements
Uses of Analytical Procedures:
As a planning tool, to determine the nature, timing, and extent of other auditing procedures
to understand the client’s business
to identify areas that may represent specific risks
In using analytical procedures as a planning tool, if the difference between recorded balances in FS and
expectations is significant, the auditor must design more extensive substantive tests (or vice versa)
As a substantive test to obtain corroborative evidence about particular assertions related to account balance or
transaction class
As an overall review of the financial statements in the completion phase of the audit
to identify unusual fluctuations that were not identified in the planning and testing phases of the audit
to confirm conclusions reached w/ respect to the fairness of the FS
Documenting the Audit Plan – the final step in planning process is the documentation of the audit planning process by
preparing:
Audit plan – the overview of the expected scope and conduct of the audit. It sets out in broad terms the
nature, timing, and extent of the audit procedures to be performed.
Audit program – it sets out in detail the audit procedures to be performed in each segment of the audit.
Time budget – is an estimate of the time that it will spent in executing the audit procedures listed in the audit
program.
AC17&18: ASSURANCE PRINCIPLES, PROFESSIONAL ETHICS AND GOOD GOVERNANCE REVIEWER
ALAMO, MARK JOSEPH S.
According to PSA, the auditor should obtain audit evidence through test of control to support any assessment
of control risk at less than high level. The lower assessment of control risk, the more support the auditor
should obtain that the IC is suitably designed and operating effectively.
Nature of Test of Controls
Inquiry – searching for appropriate information about the effectiveness of internal control from
knowledgeable persons inside or outside the entity.
Observation – refers to looking at the process being performed by others.
Inspection – involves examination of documents and records to provide evidence of reliability depending
on their nature and source and the effectiveness of IC over their processing
Reperformance – involves repeating the activity performed by the client to determine whether proper
results were obtained.
Timing of tests of controls: auditors usually perform tests of controls during an interim visit, in advance of
period end. However, auditors cannot rely on it w/o considering the need to obtain further evidence on the
remainder of the period.
In determining whether or not to test the remaining period, these must be considered: the results of the interim
tests, the length of the remaining period, and whether changes have occurred in accounting and internal control
systems during the remaining period.
Extent of test of controls: The auditor cannot examine all transactions related to certain control procedures. In
an audit, the auditor should examine the size of a sample sufficient to support the assessed level of control
risk.
Operating effectiveness vs. implementation
- When obtaining audit evidence of implementation by performing risk assessment procedures, the auditor
determines that the relevant controls exist and the entity is using them.
- When performing tests of the operating effectiveness of controls, the auditor obtains audit evidence that
controls operate effectively. This includes obtaining evidence about how controls were applied at relevant
times during period under audit, the consistency which they were applied, and by whom or by what means
they were applied.
Documenting the assessed level of control risk
- If the control risk is assessed at high level, the auditor should document his conclusion that the control risk
is at high level.
- If the control risk is assessed at less than high level, the auditor should document his conclusion that control
risk is less than high level and the basis for the assessment (basis is actually the results of TOC).
Communication of Internal Control Weaknesses
- Auditor is required to report the matter to the appropriate level of mgmt. material weaknesses in the
design or operation of the accounting and IC systems.
- Auditors are not required to search for and/or identify material control weaknesses.
- Internal control weaknesses are documented in a formal management letter.
AC17&18: ASSURANCE PRINCIPLES, PROFESSIONAL ETHICS AND GOOD GOVERNANCE REVIEWER
ALAMO, MARK JOSEPH S.
2. Systems development and documentation controls – to facilitate use of program as well as changes that
may be introduced to system
3. Access controls – adequate security controls, such as use of passwords
4. Data recovery controls – provides maintenance of back-up files and off-site storage procedures.
5. Monitoring controls – to ensure that CIS controls are working effectively as planned.
B. Application Controls – are those policies and procedures that relate to the specific use of the system.
1. Controls over Input – designed to provide reasonable assurance that data submitted for processing are
complete, properly authorized and accurately translated into machine readable form.
Key verification – this requires data to be entered twice to provide assurance that there are no key entry
errors committed.
Field check - this ensures that the input data agree with required field format.
Ex.: SSS number must contain 10 digits. An input of SSS number w/ more or less than 10 digits will be rejected
Validity check – info entered are compared with valid info in the master file to determine the authenticity of
the input.
Ex.: Employees’ master file may contain two valid codes to indicate the employee’s gender “1” for male and
“2” for female. A code of “3” is invalid and will be rejected.
Self-checking digit – this is a mathematically calculated digit w/c is usually added to a document number to
detect common transpositional errors in data submitted for processing.
Limit check – or reasonable check is designed to ensure that data submitted for processing do not exceed a
predetermined or reasonable amount.
Control totals – these are totals computed based on the data submitted for processing. Control totals ensure
the completeness of data before and after they are processed.
Financial totals – sum total of the peso amount in the documents
Hash totals – sum total of the control numbers in the documents
Record count - total number of the documents
2. Controls over Processing – designed to provide reasonable assurance that input data are processed
accurately, and that data is not lost, added, excluded, duplicated, or improperly changed.
Almost all of input controls mentioned above are also part of processing controls.
3. Controls over Output – designed to provide reasonable assurance that the results of processing are
complete, accurate, and that these outputs are distributed only to authorized personnel.
AC17&18: ASSURANCE PRINCIPLES, PROFESSIONAL ETHICS AND GOOD GOVERNANCE REVIEWER
ALAMO, MARK JOSEPH S.
Develop Expectations
about the FS
NO
Is the Conduct further
difference
significant?
Investigation
YES
When intending to perform analytical procedures as substantive tests, the auditor should focus on those
accounts that are predictable. The following generalizations may be helpful in assessing the predictability
of those accounts:
Income statement accounts are more predictable compared to balance sheet accounts.
Accounts that are not subject to management discretion are generally predictable.
Relationships in a stable environment are more predictable than those in a dynamic or unstable
environment.
2. Test of Details
It involves examining the actual details making up the various account balances. This approach may take
the form of:
Test of details of balances – involves direct testing of the ending balance of an account
* This will be used when account balances are affected by large volume of relatively immaterial
transactions.
Test of details of transactions - involves testing the transactions which give rise to the ending
balance of the account.
* This is useful if account balances are comprised of a smaller volume of transactions representing
relatively material amounts.
AC17&18: ASSURANCE PRINCIPLES, PROFESSIONAL ETHICS AND GOOD GOVERNANCE REVIEWER
ALAMO, MARK JOSEPH S.
In addition, the auditor may use one or a combination of the following approaches:
1. Review and test the process used by mgmt. to develop the estimate.
2. Make an independent estimate
3. Review subsequent events which confirm the estimate made.
RELATED PARTIES – refers to persons or entities that may have dealings w/ one another in which one party as the ability
to exercise significant influence or control over the other party in making financial and operating decisions.
Management’s Responsibility: Mgmt. is responsible for the identification and disclosure of related parties and
transactions with such parties.
Auditor’s responsibility: The auditor should obtain and review information provided by the directors and mgmt.
identifying the names of all known related parties and related party transaction.
- An audit cannot be expected to provide assurance that all related party transactions will be discovered.
USING THE WORK OF AN AUDITOR’S EXPERT
An expert is a person or firm possessing special skill, knowledge and experience in a particular field other than
accounting and auditing.
PSA 620 identifies two kinds of experts:
Auditor’s Expert – an expert, whose work in his/her field of specialization, is used by the auditor to
assist the auditor in obtaining sufficient appropriate audit evidence.
Management’s Expert – an expert, whose work in his field of expertise, is used by the entity to assist in
preparing the financial statements .
Not all engagements would require the help of an expert. When determining the need of use of the work of an
expert, the auditor would consider: whether the mgmt. has used a mgmt.’s expert in preparing FS, the nature
and significance of the matter, the risk of material misstatement in the matter, and expected nature of
procedures to respond to identified risks
Effect of the Reliance on Expert’s Work on the Auditor’s Report
The auditor has sole responsibility for the audit opinion expressed and that responsibility is not
reduced by the auditor’s use of the work of an expert. Thus, the auditor should not refer to the work of
an auditor’s expert in an auditor’s report containing an unmodified opinion.
When an auditor’s report contains a modified opinion, the auditor can make reference to the expert’s
work if the auditor believes that such reference is necessary in order for the readers to understand the
reason of expressing a modified opinion. When this happens, the auditor should indicate in his report
that such reference does not reduce the auditor’s responsibility for that opinion.
CONSIDERING THE WORK OF INTERNAL AUDITORS
Internal auditing is an appraisal activity established within an entity as a service to the entity. Considering the work of
internal auditor involves two important phases:
1. Making a preliminary assessment of internal auditing (considering the competence, objectivity, due
professional care, and scope of function of internal auditors)
2. Evaluating and testing the work of internal auditing – to confirm its adequacy for the external auditor’s
purposes.
* The external auditor may also request the assistance of the internal auditors in performing routine or mechanical
audit procedures.
AC17&18: ASSURANCE PRINCIPLES, PROFESSIONAL ETHICS AND GOOD GOVERNANCE REVIEWER
ALAMO, MARK JOSEPH S.
AUDIT SAMPLING
PSA 530 defines audit sampling as, “the application of audit procedures to less than 100% of the items within
an account balance or class of transactions such that all sampling units have a chance of selection.
Risks in Sampling
1. Sampling risk –refers to the possibility that the auditor’s conclusion, based on a sample may be different from
the conclusion reached if the entire population were subjected to the same audit procedures. This exists
because the sample selected for testing may not be truly representative of a population.
Type Test of Control Substantive Test
Alpha Risk – results in an auditor performing
audit procedures more than what is necessary, Risk of underreliance Risk of incorrect rejection
thus affecting audit efficiency
Beta Risk - results in an auditor performing
audit procedures less than what is necessary, Risk of overreliance Risk of incorrect acceptance
thus affecting audit effectiveness.
The only way to eliminate sampling risk is to examine the whole population, yet it is not feasible to do so.
Controlling Sampling Risk: This can be done by:
Increasing the sample size
Using an appropriate selection method
2. Non-sampling risk – refers to the risk that the auditor may draw incorrect conclusions about the account
balance or class of transactions because of human errors.
Non-sampling risk is something that cannot be eliminated even if the auditor examines the population.
Controlling Non-sampling Risk: This can be done by proper planning, adequate direction, review, and
supervision of the audit team.
General Approaches to Audit Sampling
1. Statistical sampling – is a sampling approach that uses random based selection of sample and uses the law of
probability to measure sampling risk and evaluate sample results.
2. Non-statistical sampling - is a sampling approach that purely uses auditor’s judgment in estimating sampling
risks, determining sample size, and evaluating sample results.
Audit Sampling Plans
Sample Selection Methods for Test of Controls and Substantive Tests (Step 4):
1. Random number selection – the auditor selects the sample by matching random numbers, generated by a
random number table or a computer software generator.
2. Systematic selection – this involves a constant sampling interval and then selects the sample based on the size
of the interval.
3. Haphazard selection – the sample is selected without following an organized or structured technique.
For Substantive Tests only:
In addition, the auditor may divide or stratify the population to decrease the effect of variance in the
population.
4. Value Weighted Selection/ Probability Proportional or Size Sampling/ Monetary Unit Sampling – each peso is
treated as one sampling unit. This method gives monetary values greater representation in the sample.
Situations that Auditor May Encounter in Step 4 & 5:
1. Void documents – such document should be replaced by another sample item.
2. Missing documents – such document must be treated as a deviation.
Evaluating the Results for Test of Control (Step 6):
1. Determine the sample deviation rate.
2. Compare the sample deviation rate with tolerable deviation rate and draw an overall conclusion of the
population.
If sample deviation rate is greater than tolerable deviation rate – means that sample results do not support the
planned degree of reliance on IC. Control risks will be assessed at high level and more extensive ST will be
performed.
If sample deviation rate is less than tolerable deviation rate – consider the allowance for sampling risk (the
possibility that these sample results could have occurred even if the actual population deviation rate is higher
than TD)
a. If SD is considerably lower than TD (Ex.: SD at 2% vs. TD of 10%) – the sample results supported the planned
degree of reliance on IC.
b. If SD is barely lower than TD (Ex.: SD at 8% vs. TD of 10%) - there is high possibility that the actual deviation
rate will exceed the TD rate.
Other Sampling Applications:
1. Sequential sampling/ stop-or-go sampling – used when an auditor expects very few deviations within the
population. Under this method, the auditor does not use fixed sample size.
2. Discovery sampling – this form of attribute sampling is most appropriate when no deviations are expected in
the population. This is normally used when the auditor suspects that an irregularity might have been committed.
Evaluating the Results for Substantive Tests (Step 6):
3. Project the misstatements in the population.
When mgmt. does not provide written representation or the auditor concludes that there is sufficient doubt on
the integrity of the mgmt., the auditor should consider these as scope limitation that would warrant a
DISCLAIMER OF OPINION.
4. Performing wrap-up procedures.
Wrap-up procedures are procedures done at the end of the audit that generally cannot be performed before
the other audit work is complete. These include:
a. Final analytical procedures
PSA 520 states that the auditor should apply analytical procedures at or near the end of the audit.
Analytical procedures applied in completion phase should focus on: identifying unusual fluctuations
that were not previously identified and assessing the validity of the conclusions reached and
evaluating the overall FS presentation.
b. Evaluation of the entity’s ability to continue as a going concern
The auditor’s responsibility is to consider the appropriateness of mgmt. use of GC assumption
(consider whether there are event s that cast a significant doubt on entity’s ability to continue as
going concern and evaluate mgmt.’s assessment of the entity’s ability to continue as GC)
When evaluating the entity’s GC assumption, the auditor should remember that the conditions and
events that may indicate significant doubt about entity’s continued existence may be mitigated by
other factors (alternatives such as disposal of assets, obtaining additional capital, etc.)
Effect on the auditor’s report:
If there is reasonable assurance that the entity is going concern, the auditor should express an
UNMODIFIED OPINION.
If there is uncertainty and is adequately disclosed that the entity is going concern, the auditor
should express an UNMODIFIED OPINION WITH EMPHASIS OF MATTER PARAGRAPH.
If there is uncertainty and is not adequately disclosed that the entity is going concern, the
auditor should express EITHER QUALIFIED OR ADVERSE OPINION.
If the GC assumption is not appropriate, the FS should be prepared using other appropriate
basis. Otherwise the auditor should issue an ADVERSE OPINION.
c. Evaluating audit findings and preparing a list of potential adjusting entries.
If mgmt. accepts all adjusting entries proposed by the auditor, an UNMODIFIED OPINION is
issued.
If mgmt. refuses to correct the FS, a QUALIFIED OR AN ADVERSE OPINION will be issued.
POST AUDIT RESPONSIBILITIES (Events after the FS have been issued)
Ordinarily, the auditor does not have any responsibility to perform additional procedures after the FS are
issued, unless the auditor is aware that the audit report issued may be inappropriate (he must take steps to
prevent future reliance on such report).
Subsequent discovery of facts
1. Discuss the matter w/ the appropriate level of mgmt. and consider whether the FS needs
revision.
2. Advise mgmt. to take steps to ensure the users of the previous issued FS are informed of the
situation.
If mgmt. makes appropriate revisions and disclosures, the auditor should issue a new audit
report that includes an EMPHASIS OF MATTER PARAGRAPH. If mgmt. refuses to revise the
FS or to inform the users about the new info, the auditor should notify the persons
responsible for the refusal and intent to prevent reliance to the audit report.
Subsequent discovery of omitted procedures
1. Assess the importance of the omitted procedures to the auditor’s ability to support his opinion
2. Undertake to apply the omitted procedures or the corresponding alternative procedures.
If omission impairs the current ability to support his opinion, apply the procedures.
If, after applying the omitted procedures, it makes the report inappropriate, discuss this
matter with mgmt. to take steps to prevent reliance in the report.
AC17&18: ASSURANCE PRINCIPLES, PROFESSIONAL ETHICS AND GOOD GOVERNANCE REVIEWER
ALAMO, MARK JOSEPH S.
Piecemeal Opinion
It is an unmodified opinion expressed on one or more components of the FS while expressing an adverse or
disclaimer of opinion as a whole. PSA 705 does not allow this practice.
EMPHASIS OF MATTER PARAGRAPH (placed after Auditor’s Opinion Paragraph)
EMPHASIS OF MATTER
(to give emphasis on an important matter affecting the FS or the auditor’s report;
these does not negate the auditor’s unmodified opinion)
1. Uncertainties*
2. Going Concern** Adequately Unmodified
3. Early Application of New Accounting Standards disclosed in the Opinion with
4. Major Catastrophe notes to the FS Emphasis Matter
5. Subsequent Discovery of Facts
Paragraph
6. Special Purpose FS
OTHER MATTER
(to communicate a matter other than those that are presented or disclosed in the FS)
MATERIAL INCONSISTENCIES – exists when the other information* contradicts the information contained in the
audited FS.
MATERIAL MISSTATEMENT OF FACTS: This exists when other information, not related to matters appearing to FS, is incorrectly
presented. If the auditor concludes that there is a material misstatement of fact and the mgmt. refuses to correct the other
information, the auditor should notify the audit committee and if necessary, obtain legal advice.
(d) Familiarity threat – occurs when, by virtue of close relationship with a client, its directors, etc. becomes too
sympathetic to the client’s interests.
(e) Intimidation threat – is the threat that a professional accountant will be deterred from acting objectively
because of actual or perceived pressures, including attempts to exercise undue influence over the professional
accountant.
Safeguards
(a) Safeguards created by the profession, legislation or regulation; and
(b) Safeguards in the work environment.
• Firm-wide safeguards
• Engagement specific safeguards
• Safeguards within the client’s systems and procedures
PART A—GENERAL APPLICATION OF THE CODE
• Section 100 Introduction and Fundamental Principles
• Section 110 Integrity – not merely honesty but fair dealing and truthfulness.
• Section 120 Objectivity – to be fair, intellectually honest, and free of conflicts of interest
• Section 130 Professional Competence and Due Care –
Professional competence means he/she should continually strive to improve his knowledge and skills to ensure
that a client or employer receives the advantage of competent professional service based on up-to-date
developments in practice, legislation, and techniques. It is divided into two phases: attainment and
maintenance
AC17&18: ASSURANCE PRINCIPLES, PROFESSIONAL ETHICS AND GOOD GOVERNANCE REVIEWER
ALAMO, MARK JOSEPH S.
Due professional care encompasses the responsibility to perform professional services in accordance with
technical and professional standards.
• Section 140 Confidentiality – he/she should not use or disclose any such information w/o proper and specific
authority or unless: permitted by the client or employer, required by law, there is a professional duty to
disclose information
• Section 150 Professional Behavior – he/she should comply with relevant laws and regulations
PART B—PROFESSIONAL ACCOUNTANTS IN PUBLIC PRACTICE
• Section 200 Introduction
• Section 210 Professional Appointment
• Section 220 Conflicts of Interest
• Section 230 Second Opinions
• Section 240 Fees and Other Types of Remuneration
• Section 250 Marketing Professional Services
• Section 260 Gifts and Hospitality
• Section 270 Custody of Client Assets
• Section 280 Objectivity―All
• Section 290 Independence―Audit and Review Engagements
• Section 291 Independence―Other Assurance Engagements
Independence of mind - is the auditor’s perception of his own independence.
Independence in appearance – refers to the public perception of the professional accountant’s independence.
Independence Requirements of Different Assurance Engagements:
the Board of Assurance Clients does not participate in the mgmt. on the board of an assurance client
or operations of the client
Long association with assurance Lead engagement partners must
clients be rotated at least once every 5
years (for listed companies)
Provision of accounting and Provision of services to an audit
bookkeeping services to assurance client hat is a public interest entity
clients
Provision of taxation services to
assurance clients
Provision of legal services to Advisory services Advocacy services
assurance clients Corporate finance services
Recruiting Senior Management Recruited for ultimate hiring Recruited for consulting services
decision
Fees – overdue At the time of issuing the
assurance report, the PY
professional fees due from client is
unpaid
Contingent Fees Fees that are fixed by court or
other public authority, fees
determined based on the results of
judicial or gov’t agency
proceedings
Gifts and Hospitality
Actual or threatened litigation
2. Article II | Rule II
Professional Regulatory Board
- Chairman & 6 members
- APO should submit its nominees not later than 60 days
- Qualifications:
o Natural born Filipino o Of good moral character
o Registered CPA w/ 10 years o Not have any pecuniary interest
experience o Not a director or officer of APO
- Term: 3 years ; no person shall serve in the Board for more than 12 years
- Receive compensation & allowances
- Powers & functions:
o Monitor conditions o Adopt official seal
o Supervise registration, licensure & o Investigate violations
practice o Punish for contempt
o Prescribe & adopt rules o Prepare/Amend syllabi for
o Conduct oversight into quality examinations
o Issue, suspend, revoke or reinstate o Exercise other powers provided by
the registration law
- Submit a report @ close of each year
- FRSC composed of 15 members with a chairman and 14 representatives
- AASC composed of 15 members with a chairman and 14 representatives
- Educational Technical Council (ETC) composed of 7 members with a chairman and 6 representatives with the
functions of:
o Determine a min standard curriculum
o Establish teaching standards
o Monitor progress of program
o Evaluate performance of educational institutions
- Board is under supervision of the Commission
- May remove/suspend members of the board when:
o Neglect of duty
o Violation of the Act
o Final judgment of crimes involving moral turpitude
o Manipulation
Last June 20, 2015, the Board of Accountancy (BOA) unanimously decided to propose to the Professionals
Regulation Commission (PRC) the revision of the subjects covered by the CPA Licensure Examination. BOA has the
authority to amend the CPA examination subject to the approval of PRC. The subjects that were recommended to be
included in the CPA board examination are:
1. Financial Accounting and Reporting
2. Advanced Accounting
3. Management Accounting and Control
4. Auditing
5. Taxation
6. Regulatory Framework for Business Transactions
- Board will submit to the Commission the rating of candidates w/in 10 days after the examination
- 2 consecutive fails will be disqualified to take another unless he takes 24 units of subject given in the exam
- All successful candidates will take an oath of profession
- Certificate of Registration
- Identification Card
- Board has the power to suspend the practitioner’s certificate
- After expiration of 2 years, the board may reinstate its validity
4. Article 4 | Rule IV
Practice of Accountancy
- Cannot practice without BOA’s certificate and identification card
- Limitations:
o Accreditation certificate will be provided, as long as 3 yrs. of practice was acquired
o CPAs in public practice shall renew every 3 yrs.
o CPE
- Foreigners may practice in the Philippines. as long as they follow the laws of the country and pass certain
requirements
- Foreigners may obtain special permits
- Working papers, schedules & memoranda made by CPA shall remain his property unless a written
agreement between him and the client has been made
- Meaningful experience shall be considered as satisfactory compliance
- All licensed shall use a seal prescribed by the Board
5. Article 5 | Rule V
Penal Provisions
- Anyone who violates: fine of not less than 50,000 or imprisonment not exceeding 2 years
- Nothing in the act shall prevent the practice of any other legally recognized profession
- Primary duty of the Board and Commission to enforce the provisions of the Act
6. Annex A
Covering the accreditation of an accredited national professional organization of CPAs, Renewal of certificate of
accreditation and its cancellation
7. Annex B
Covering the accreditation of individual CPAs, firms and partnerships of CPAs engaged in the practice of public
accountancy
8. Annex C
Covering the CPE programs for CPAs
THE END