INTRODUCTION TO ASSURANCE ENGAGEMENTS
ASSURANCE SERVICES/ENGAGEMENTS
 Assurance services – independent professional
services in which a practitioner issues a written
communication
 Independence is required whenever a professional
accountant performs assurance services.
 Assurance engagement –which a practitioner
expresses a conclusion designed to enhance the
degree.
OBJECTIVE OF AN ASSURANCE SERVICES
 Assurance engagements performed by professional
accountants are intended to enhance the credibility
of information.
 According to the Philippine Framework for Assurance
Engagements, an assurance engagement is
conducted:
o To provide a high level of assurance
o To provide a moderate level of assurance
TYPES OF ASSURANCE ENGAGEMENTS
Reasonable assurance engagements – engagements that
provide high, but not absolute, level of assurance.
 Also called high-level engagements.
 The objective of a reasonable assurance
engagement is a reduction in assurance
engagement risk to an acceptably low level
 Absolute assurance is not attainable:
 Use of judgement
 Use of testing
 Inherent limitations of internal
control
 Most evidence available to the
practitioner is persuasive rather
than conclusive.
 In some cases, the characteristics
of the subject matter
Limited assurance engagements – engagements that provide
only a “moderate” or “limited” level of assurance.
• The objective of a limited assurance
engagement is a reduction in assurance
engagement risk to an acceptable level
• For assurance engagements regarding
historical financial information in particular,
limited assurance engagements are called
review engagements.
ELEMENTS OF ASSURANCE ENGAGEMENTS
Not all engagements performed by practitioners are
assurance engagements. An assurance engagement must
have the following elements:
o Three party
o Appropriate subject matter
o Suitable
o Sufficient appropriate evidence
o Written assurance report in the form appropriate to
a reasonable assurance
RELATIONSHIP AMONG AUDITING, ATTESTATION, AND
ASSURANCE SERVICES
Similarity: These services are often used interchangeably
because they encompass the same decision-process.
Main difference/distinction: Scope of services
 “Assurance services” is broader in scope
and in concept than either auditing or
attestation
 “Attestation services” is broader than audit
because attest function is beyond historical
FS
 Type of assurance and attestation service
that involves examination of historical FS
prepared in accordance with GAAP.
INTRODUCTION TO AUDITING
AUDIT
Assurance engagement –a practitioner expresses a
conclusion designed to enhance the degree of
confidence.
Audit is a systematic process of objectively obtaining
and evaluating evidence regarding assertions about
economic actions and events.
Auditing is a structured process that:
(a) involves the application of analytical skills,
professional judgment and professional skepticism;
(b) is usually performed by a team of professionals,
directed with managerial skills;
(c) uses appropriate forms of technology and
adheres to a methodology;
(d) complies with all relevant technical standards,
(e) complies with required standards of professional
ethics. (IFAC)
Objective of Audit of Financial Statements (FS)
  FS Audit enables the auditor to express an opinion
General Principles
o Audit shall be conducted in accordance with
Philippine Standards on Auditing.
o Comply with Code of Professional Ethics for
Certified Public Accountants.
o Plan and perform the audit with an attitude
of professional skepticism.
o Audit enhances credibility of FS
o Audit says nothing about the viability of an
entity
o The responsibility for preparing and
presenting the financial statements is.
o Audit does not relieve the management of
its responsibilities.
CODE OF ETHICS
Code of Ethics for Professional Accountants in the Philippines
 Based on the International Code of Ethics for
professional accountants developed by
 the International Federation of Accountants.
 Divided into three parts:
Part A - applies to all professional accountants unless
otherwise specified.
Part B - applies only to those professional accountants in
public practice.
Part C - applies to employed professional accountants
Fundamental Principles that CPAs should observe:
✓ Integrity
✓ Objectivity
✓ Professional competence and due care
✓ Confidentiality
✓ Professional behavior
Members of assurance teams, firms, and network firms
should identify THREATS to independence, evaluate the
significance of those threats, and, if the threats are other
than clearly insignificant,
• Eliminate the activities or interest creating the
threat;
• Refuse to accept or continue the assurance
engagement.
Rules Applicable to Professional Accountants in
Public Practice
Independence Requirements in Assurance
Engagements
• For assurance engagements provided to an audit
client, the member of the assurance team,
Network firm - an entity under common control,
ownership or management with the firm.
Financial interest - an interest in equity or other security,
debenture, loan or other debt instrument of an entity.
Direct financial interest - a financial interest:
• Owned directly by and under the control of an
individual or entity; or
Indirect financial interest - a financial interest beneficially
owned through a collective investment vehicle, estate,
trust or other intermediary.
Threats to Compliance with Fundamental Principles
 Self-Interest Threat – The threat that a financial
or other interest will inappropriately influence
the accountant’s judgement or behavior.
Examples:
 Self-Review Threat – The threat that an
accountant will not appropriately evaluate the
results of a previous judgement made
 Advocacy Threat - Occurs when a firm, or a
member of the assurance team, promotes, or
may be perceived to promote
 Familiarity Threat - Occurs when, by virtue of a
close relationship with an assurance client
 Intimidation Threat – The threat that an
accountant will be deterred from acting
objectively.
REPUBLIC ACT NO. 9298 – PHILIPPINE ACCOUNTANCY
ACT OF 2004 (AND ITS IMPLEMENTING RULES AND
REGULATIONS)
Objectives of the Philippine Accountancy Act:
• The standardization and regulation of accounting
education.
• The examination for registration of CPAs.
Scope of Practice of Accountancy:
Practice of accountancy shall include, both not limited to
the following:
• Practice of Public Accountancy
• Practice in Commerce and Industry
• Practice in Education / Academe
• Practice in Government
Limitations of the Practice of Public Accountancy:
• Single practitioners (individual CPAs) and Partnership
of CPAs shall be registered CPAs in the Philippines.
• The SEC shall not register any corporation organized
• A certificate of accreditation issued only after
showing that the registrant has acquired the
minimum 3 years meaningful experience in any of
the areas of
Certificate of Accreditation – a certificate under seal,
issued by the PRC
Prohibition in the Practice of Accountancy:
Non-CPAs:
• Are not allowed to practice accountancy in the
Philippines.
• Cannot use the title “Certified Public Accountant” or
“CPA”.
• Should not indicate that he practices or offers to
practice accountancy or that he is a CPA.
Non-Filipino professional accountants/CPAs:
• Are also not allowed to practice accountancy in the
Philippines, unless:
- Through foreign reciprocity.
- With valid temporary/special permit duly issued by
the BOA and the PRC.
Professional Regulatory Board of Accountancy (BOA):
• The BOA is the official government agency
empowered to enforce RA 9298.
• BOA is under the supervision and administrative
control of the Professional Regulation Commission
(PRC).
Composition of BOA:
• BOA shall be composed of a chairman and 6
members.
• BOA shall elect a vice-chairman from among its
members for a term of 1 year.
Qualifications of BOA members: At the time of
appointment, he/she must be:
• Natural-born citizen and a resident of the
Philippines.
• Duly registered CPA with at least 10 years of work
experience in ANY scope of practice of accountancy.
• Of good moral character and must not have been
convicted of crimes involving moral turpitude.
• Not have any pecuniary interest, directly or
indirectly, in any school, college, university or
institution conferring an academic degree necessary
for admission to the practice of accountancy.
• Not be a director/officer of the APO (PICPA) at the
time of his/her appointment – this is an additional
requirement under the IRR.
Term of office of BOA members:
• The Chairman and the members of the BOA
members shall hold office for a term of 3 years.
• Any vacancy during the term of a member shall be
filled up for the unexpired portion of the term only.
Appointment to fill up an unexpired term is not to be
construed as a complete term.
• No person who has served 2 successive complete
terms shall be eligible for reappointment until the
lapse of 1 year.
• No person shall serve in the BOA for more than 12
years.
Powers and Functions of the BOA:
The BOA shall exercise the following specific powers,
functions and responsibilities:
• To prescribe and adopt the rules and regulations
necessary for carrying out the provisions of this Act
(RA 9298).
• To supervise the registration, licensure and practice
of accountancy in the Philippines.
• To administer oaths.
• To issue, suspend, revoke, or reinstate the Certificate
of Registration for the practice of the accountancy
profession.
• To adopt its own official seal.
• To prescribe and/or adopt a Code of Ethics for the
practice of accountancy.
• To conduct an oversight into the quality of audits of
financial statements through a review of the quality
control measures.
Grounds for Suspension or Removal of BOA Members:
The President of the Philippines, upon the
recommendation of the PRC may suspend or remove any
BOA member on the following grounds:
• Neglect of duty or incompetence.
• Violation or tolerance of any violation of RA 9298
and its IRR or the CPA Code of Ethics and the
technical and professional standards of practice for
CPAs.
• Final judgment of crimes involving moral turpitude.
• Manipulation or rigging of the CPA's licensure
examination results
CPA Examinations:
All applicants for registration for the practice of
accountancy shall be required to undergo a licensure
examination to be given by the BOA.
Qualifications of Applicants for CPA Examinations:
• Must be a Filipino citizen.
• Must be of good moral character.
• Must be a holder of the degree of BSA.
• Has not been convicted of any criminal offense
involving moral turpitude.
Scope of Examinations:
The CPA examination shall cover, but are not limited to,
the following subjects:
• Financial Accounting and Reporting
• Advanced Financial Accounting and Reporting
• Management Advisory Services
• Auditing
• Regulatory Framework for Business Transactions
• Taxation
Rating in the CPA Examinations:
• To pass the CPA exams: A candidate must obtain at
least a general average of 75%, with no grades lower
than 65% in any given subject.
• Conditional status: If a candidate obtains a rating of
75% and above in at least a majority of the subjects
tested, he/she will be given conditional credits for
the subjects passed.
Removal Examination:
• The candidates with conditional status shall take an
examination in the remaining subjects within 2 years
from the preceding examination.
• If the candidate fails to obtain at least a general
average of 75% and a rating of at least 65% in each
of the subjects reexamined, he/she shall be
considered as failed in the entire examination.
• The original exam and the removal exam are
counted as one exam only.
Candidates required to take Refresher Course:
• Any candidate who fails in 2 complete CPA exams
shall be disqualified from taking another set of
examinations unless he/she submits evidence to the
satisfaction of the BOA.
• 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.
• The IRR provides that the required refresher course
shall be offered only by an educational institution
granting a degree of BSA.
Issuance of Certificates of Registration and Professional
Identification Card:
Certificate of Registration – a certificate under seal
bearing a registration number, issued to an individual, by
the PRC, upon recommendation by the BOA
• A certificate of registration shall be issued to
examinees who pass the CPA licensure examination
subject to payment of fees prescribed by the PRC.
• The Certificate of Registration shall bear the
signature of the chairperson of the PRC and the
chairman and members of the BOA, stamped with
the official seal of the PRC and of the BOA.
Professional Identification Card – a card with validity of 3
years bearing the registration number, date of issuance
with an expiry date, due for periodic renewal, duly signed
by the Chairperson of the PRC issued by the PRC to a
registered CPA upon payment of the annual registration
fees for 3 years.
Expiration:
• Certificate of Registration – has no expiry; shall
remain in full force until/unless withdrawn,
suspended or revoked.
• Professional Identification Card – subject to expiry;
renewable every 3 years.
Grounds for Refusal to Issue Certificate of Registration
and Professional ID:
• The BOA shall not register and issue a certificate of
registration and professional identification card to
any successful examinee due to the following
grounds:
- Convicted by a court of competent jurisdiction of a
criminal offense involving moral turpitude.
- Guilty of immoral and dishonorable conduct.
- Of unsound mind
• The BOA shall not register either, any person who
has falsely sworn, or misrepresented himself/herself
in his/her application for examination.
• Registration shall not be refused, and a name shall
not be removed from the roster of CPAs on
conviction for a political offense (or for an offense, in
 the opinion of the BOA, that does not disqualify a
person from practicing accountancy).
Suspension and Revocation of Certificates of Registration
and Professional Identification Card and Cancellation of
Special Permit:
• The BOA shall have the power, upon due notice and
hearing, to:
- Suspend or revoke the practitioner’s certificate of
registration and professional identification
card.
• Causes or Grounds for
Suspension/Revocation/Cancellation:
- Convicted by a court of competent jurisdiction of a
criminal offense involving moral turpitude.
• .Causes or Grounds for
Suspension/Revocation/Cancellation:
- Guilty of immoral and dishonorable conduct.
- Of unsound mind.
- Any unprofessional or unethical conduct.
- Malpractice.
- Violation of any of the provisions of this Act and its
IRR.
- Violation of the CPA‘s Code of Ethics and the
technical and professional standards of
practice for CPAs.
Reinstatement, Reissuance and Replacement of Revoked
or Lost Certificates:
• The BOA may, after the expiration of 2 years from
the date of revocation of a certificate of registration
and upon application and for reasons deemed
proper and sufficient, reinstate the validity of a
revoked certificate of registration and in so doing,
may, in its discretion, exempt the applicant from
taking another examination.
• Continuing Professional Development (CPD)
Program:
Rationale: Voluntary compliance with the CPD program is
an effective and credible means of ensuring competence,
integrity and global competitiveness of professional
Continuing Professional Education (CPE) – refers to the
inculcation assimilation and acquisition of knowledge,
skills, proficiency and ethical and moral values
CPD program – consists of properly planned and
structured activities, the implementation of which
requires the participation of a determinant group of
professionals.
• CPD Program:
• CPD credit units:
- 15 credit units for 3 years
• Exemption from CPE requirement:
- Permanent exemption: Upon reaching the age of
65 years old.
- Temporary exemption: If the following conditions
are met:
- During their stay abroad for at least 2
years immediately prior to the date of
renewal.
- Working or practicing his/her profession or
furthering his/her studies abroad.
Seal and Use of Seal:
• All licensed CPAs shall obtain and use a seal of a
design prescribed by the BOA bearing the
registrant’s name, registration number and title.
• The auditor’s reports shall be stamped with said seal,
indicating therein his/her current Professional Tax
Receipt (PTR) number, date/place of payment when
filed with government authorities or when used
professionally.
Coverage of Temporary or Special Permits:
• All licensed CPAs shall obtain and use a seal of a
design prescribed by the BOA bearing the
registrant’s name, registration number and title.
• The auditor’s reports shall be stamped with said seal,
indicating therein his/her current Professional Tax
Receipt (PTR) number, date/place of payment when
filed with government authorities or when used
professionally.
• Special / temporary permit may be issued by the
BOA subject to the approval of the PRC and payment
of the fees the latter has prescribed and charged
thereof to the following Foreign CPAs:
- A foreign CPA called for consultation or for a
specific purpose which, in the judgment of the BOA
- A foreign CPA engaged as professor, lecturer or
critic in fields essential to accountancy education in
the Philippines and his/her engagement is confined to
teaching only.
• A foreign CPA who is an internationally recognized expert
or with specialization in any branch of accountancy
Penal Provisions:
• Any person who shall violate any of the provisions of
this Act or any of its IRR shall, upon conviction, be
punished by:
Fine – not less than P 50,000.00, or
Imprisonment – for a period not exceeding 2 years,
or both.
Standard-Setting Bodies:
Local/Domestic:
• Financial Reporting Standards Council (FRSC)
– accounting standard-setting body/council
created by the BOA.
Standard-Setting Bodies:
Local/Domestic:
• Auditing and Assurance Standards Council (AASC)
– auditing standard-setting body/council
created by the BOA.
• BIR representation. The BIR, although represented in
the FRSC, is not represented in the AASC.
• Appointment. The Chairman and members of the
FRSC and AASC shall be appointed by the PRC upon
the recommendation of the BOA in connection with
the accredited professional organization (PICPA).
• Term of office. The Chairman and members of both
the FRSC and AASC shall have a term of 3 years
renewable for another term.
• Main function of FRSC and AASC: To assist BOA in
carrying out its powers and functions on monitoring
the conditions affecting the practice of accountancy
and adoption of such measures, including
promulgation of accounting and auditing standards,
rules and regulations and best practices.
Professional and Sectoral Organizations:
• Philippine Institute of Certified Public Accountant
(PICPA) – the globally-recognized and integrated
national professional organization of CPAs in the
Philippines accredited by the BOA and the PRC.
- PICPA is designated as the accredited professional
organization (APO) in the Philippines.
- The Mission of PICPA is to enhance the integrity of
the accountancy profession, serve the best interest of
its members and other stakeholders, and contribute to
the attainment of the country's national objectives.
• PICPA must renew its accreditation once every three
years.
Sectoral Organizations
• Serve the needs of CPAs in different scopes of
practice.
• Provide seminars, programs and workshops that
specifically serve the interests of the CPAs in their
respective sectors.
• Each sector has its own organization as follows:
Public Practice – Association of CPAs in Public
Practice (ACPAPP)
Commerce and Industry – Association of CPAs in
Commerce and Industry (ACPACI)
Education/Academe – Association of CPAs in
Education (ACPAE)
Government – Government Association of CPAs
(GACPA)
AUDIT OF RECEIVABLES
TRADE AND OTHER RECEIVABLES
• Trade and Other Receivables – a one-line-item
account used to summarize receivables that are
classified as current assets
• Composition ✓ Trade Receivables ✓ Non-trade
Receivables
• Valuation
- Short-term receivables – Face value
- Long-term receivables
- Discounted amount or present value
- Amortized cost using effective interest
method
Receivables may be current or noncurrent and trade or
nontrade.
• The rules on current and noncurrent classification
are discussed in detail under PAS 1
• Trade receivables arise from the sale of goods or
services to customers and in the form of accounts
receivable or notes receivable.
- Classified as current asset if collectible within one
year or normal operating cycle, whichever is longer.
• Nontrade receivables are receivables from all other
types of transactions like advances to officers
- Non-Trade Receivables – current asset if collectible
within one year, notwithstanding the normal operating
cycle.

• Accounts receivable arise from credit sales.
• The following transactions also affect accounts
receivable in computing for the ending balance:
The
write-off for accounts receivable under the allowance method
is recorded by:
The entry for
the write off
must be
reversed and before recording the collection with the
following two entries:
Combining the two entries will be more efficient by:
• The ending balance of accounts receivable shall be
presented as part of current assets under the
heading of “trade and other receivables” at the Net
Realizable Value (expected cash value) or “amortized
cost”
• The net realizable value shall be computed after
deducting an allowance for the following:
Sales returns – value of merchandise expected to be returned
by customers.
Sales discounts – value of price savings to customers
expected to pay within the discount period and take
advantage of the cash discount.
Doubtful accounts – allowance for expected uncollectibility
that is an inherent risk from selling on credit.
The computation for the doubtful accounts
expense which is an adjusting entry and
the allowance for doubtful accounts will
be as follows:
There are 3 methods in estimating doubtful accounts:
• The percentage of net credit sales method which will
provide the amount of doubtful accounts expense
for the year and therefore is a method that
emphasizes proper matching of doubtful accounts
against sales.
• The percentage of accounts receivable method will
provide the amount of required allowance for
doubtful accounts and just like its counterpart the
“Aging Method”.
• The aging of accounts receivable method that is
arguably the most accurate of all three methods
since an analysis is made and each classification of
accounts receivable is multiplied by a specific rate of
the estimate of uncollectibility.
Special Treatments
• Advances to Subsidiaries and Affiliates – usually
classified as long-term investments.
• Customers with Credit Balances – usually classified
as current liabilities. Otherwise, non-current
liabilities.
• Receivables from Officers, Directors, and Employees
– usually classified as current assets. Otherwise, non-
current assets.
• Subscriptions Receivables – presented as part of the
stockholders’ equity. Otherwise, part of current
assets.
• Receivables Hypothecated against Borrowings
(Pledged or Assigned) – still included as part of the
current assets with the corresponding disclosure in
the notes to financial statements.
• Receivables Discounted with Recourse – excluded.
• Receivables Sold without Recourse – excluded.
• Unearned Finance Charges and Interests – deducted
from the related receivables.
FINANCIAL STATEMENTS AUDIT - study of plausible relationships among both financial and
nonfinancial data
AUDIT PROCESS
3. Observation and inspection

 The entity’s operations

 Documents (such as business plans and strategies),

records, and internal control manuals.

 Reports prepared by management and TCWG

The entity’s premises and plant facilities

ACCEPTING AN ENGAGEMENT OTHER TO DO’s
• Competence • Determining materiality (PSA 320)
• Independence • Audit program
• Ability to serve the client properly  Assessment of overall audit risk (IR x CR x DR) –
• Integrity of the prospective client’s management COMBINED RISK ASSESSMENT (CRA)

AUDIT PLANNING (PSA 300)  CRA is inversely related to detection risk

Entity and Its environment (INOM) • Time budget

• Relevant industry, regulatory, and other external • Planning meeting with client
factors • Understand the internal control - design and
• Nature of the entity including entity’s selection and implementation
application of accounting policies  Combination of inquiry, inspection, observation, and
• Objectives and strategies, and those related business walk-through
risks • Assess control risk (high vs less than high; rely vs. not
• Measurement and review of the entity’s financial rely)
performance • Perform test of controls
Internal Controls (MARIE) • Document results of test of controls
• Control environment • Analytical procedures (PSA 520, Redrafted)
• Risk assessment process • Test of details
• Information and communication systems  Test of balances
• Control activities  Test of transactions
• Monitoring of controls • Documentation
AUDIT PLANNING  If it’s not documented, it is not done!
RISK ASSESSMENT PROCEDURES (RAPs) N-T-E of substantive tests
1. Inquiries of management, and of others within the  Nature (quality of evidence)
entity
 Timing (yearend or interim)
 Those charged with governance (TCWG)
 Extent (amount of evidence)
 Internal audit personnel
• Subsequent events (PSA 560, Redrafted)
 Accounting personnel
• Litigations, claims, and assessment
 In-house legal counsel
• Management representation (MRL) (PSA 580,
 Marketing & sales department Revised and Redrafted)
2. Analytical procedures
 • Wrap-up procedures
 Closing meeting with client
 Going concern assessment (PSA 570, Redrafted)
• Unmodified report
• Modifications (material misstatement or scope
limitation)
 Qualified opinion (if not pervasive)
 Adverse opinion (material misstatement - material
and pervasive)
 Disclaimer opinion (scope limitation - material and
pervasive)
• Emphasis of matter (EOM) paragraph
• Other Matter paragraph
UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT
AUDIT RISK AND RISK ASSESSMENT PROCEDURES
• Audit Risk - the risk that the financial statements
may contain material misstatements
• Risk of Material Misstatements (RMM) - The risk
that the financial statements are materially
misstated prior to audit.
(i) Overall FS Level (ii) Assertion Level
- Inherent Risk
- Control Risk
• b. Detection Risk
• Risks of material misstatement at assertion level are
the entity’s risks; they exist independently of the
audit of the financial statements.
• Such risks are assessed in order to determine the
nature, timing and extent of further audit
procedures.
• This evidence enables the auditor to express an
opinion on the financial statements at an acceptably
low level of audit risk.
• Detection risk relates to the nature, timing and
extent of the auditor’s It is therefore a function of
the effectiveness of an audit procedure and of its
application by the auditor.
• For a given level of audit risk, the acceptable level of
detection risk bears an inverse relationship to the
assessed risks of material misstatement at the
assertion level. For example, the greater the risks of
material misstatement the auditor believes exists,
the less the detection risk that can be accepted and,
accordingly, the more persuasive the audit evidence
required by the auditor.
• AR = IR x CR x DR
• AR = RMM x DR
• DR = 10% acceptable level; substantive tests must be
designed to provide 90% assurance of detecting
material misstatements
• DR = LOWER; (a) more effective substantive testing
(nature); (b) year-end procedure (timing); (c) larger
sample size (extent)
• DR= HIGHER (a) less effective substantive testing
(nature); (b) interim procedure (timing); (c) smaller
sample size (extent)
• IR x CR x DR
• RA = 90% ; DR = 10% CR – HIGH; NO TOC; EXTENSIVE
SUBSTANTIVE TESTING
• RA = 95% ; DR = 5% MATERIALITY – HIGH; AR – LOW;
PROCEDURES – LESS EXTENSIVE
DR = LOWER; (a) more effective substantive testing (nature);
(b) year-end procedure (timing); (c) larger sample size
(extent)
• RA = 85% ; DR = 15%
DR= HIGHER (a) less effective substantive testing (nature); (b)
interim procedure (timing); (c) smaller sample size (extent)
RISK ASSESSMENT PROCEDURES (RAP)
• Objective:
The auditor shall design and perform risk assessment
procedures to obtain audit evidence that provides an
appropriate basis for:
(a) The identification and assessment of
risks of material misstatement,
whether due to fraud or error, at the financial
statement and assertion levels; and
(b) The design of further audit procedures
in accordance with PSA 330.
• I. The RAP include the following:
a. Inquiries
b. Analytical procedures
c. Observation and inspection
During the risk assessment, the Auditor shall also consider
information from other sources such as those obtained from
previous audits.
• II. The auditor shall document: (a)
 • III. The auditor uses professional judgment to
determine the extent of RAP.
-size and complexity of the entity
-the auditor’s experience with the entity
• IV. RAP is a continuous and dynamic process.
Obtaining an Understanding of the Entity and Its
Environment & the Applicable Financial Reporting
Framework
• The auditor shall:
A. perform RAP to obtain an understanding of:
(a) The following aspects of the entity and its
environment:
-Organizational structure
-Ownership
-Governance
-Business model (extent of use of IT)
-Industry, regulatory and other external factors;
-The measures used, internally and externally, to
assess the entity’s financial performance
(b) The applicable financial reporting framework, and the
entity’s accounting policies and the reasons for any changes
thereto; and
The members of the engagement team should
discuss the:
a. Applicable Financial Reporting Framework
b. susceptibility of the entity’s FS to material
misstatements
The team’s discussion may include:
✓ Changes in financial reporting requirements that
may result in significant new or revised disclosures;
✓ Changes in the entity’s environment, financial
condition or activities that may in significant new or
revised
(c) How inherent risk factors affect susceptibility of assertions
to misstatement and the degree to which they do so, in the
preparation of the FS in accordance with the applicable
financial reporting framework,
Inherent Risk Factors - characteristics of events or conditions
that affect susceptibility to misstatement, whether due to
fraud or error, of an assertion about a class of transactions,
account balance or disclosure,
A. Identify Risks of Material Misstatement
(a) at the financial statement level; and
(b) at the assertion level for classes of transactions, account
balances and disclosures.
B. Assess Risks of Material Misstatement
C. Evaluate whether the audit evidence obtained from the
RAP provides an appropriate basis for the identification and
assessment of the risks of material misstatement.
D. Revise Risk Assessment, as necessary.
Understanding the Components of the Entity’s System of
Internal Control
A. Controls- Policies or procedures that an entity
establishes to achieve the control objectives of
management or those charged with governance.
i. Policies are statements of what should or should
not be done within the entity to effect control.
ii. Procedures are actions to implement policies.
B. The auditor shall understand the Components of the
Entity’s System of Internal Control
System of internal control
1. The system designed, implemented, and
maintained by governance
a. those charged with
b. Management
c. other personnel
2. Providing reasonable assurance about the achievement of
an entity’s objectives which include:
a. reliability of financial reporting
b. effectiveness and efficiency of operations
c. compliance with applicable laws and regulations.
Components of the Entity’s System of Internal Control
(i) Control environment; (ii) The entity’s risk assessment
process; (iii) The entity’s process to monitor the system of
internal control; (iv) The information system and
communication; and (v) Control activities.
Direct controls are controls that are sufficiently precise to
prevent, detect, or correct misstatements at the assertion
level.
Indirect controls are controls that support direct controls.
C. Specific Consideration
The auditor shall obtain an understanding of the
COMPONENTS relevant to the preparation of the financial
statements AND evaluate these components through -identified and assessed RMM at the financial
performing risk assessment procedures. statement level and at the assertion level

D. Control Deficiencies Based on the auditor’s evaluation of
each of the components of the entity’s system of internal
control,
E. Assessing Control Risk
A. If the auditor plans to test the operating effectiveness of
controls, the auditor shall assess control risk.
-the risks identified and related controls evaluated as
a result of the RAP
PSA 330: RESPONSES TO ASSESSED RISK (RAR)
A. The auditor has a responsibility to design and
implement responses to the RMM (IR, CR) identified
and assessed.

B. If the auditor does not plan to test the operating a. Overall responses
effectiveness of controls, the auditor’s assessment of control
risk shall be such that the assessment of the RMM is the same b. Responses Assessed Risks of Material
as the assessment of inherent risk. Misstatement at the Assertion Level

F. Documentation B. The auditor should carefully plan to minimize the risk of

The auditor shall include in the audit documentation the
evaluation of the design of identified controls.
G. Limitations of Internal Control
failing to detect material misstatements at the FS and
assertion level (DR).
C. The auditor’s RAR should enable the gathering of Sufficient,
Appropriate Evidence

No matter how well designed and operated, IC can provide an D. RAR-Tests of Controls (TOC)
entity with only reasonable assurance about achieving the
entity’s financial reporting objectives. An audit procedure designed to evaluate the
operating effectiveness of controls in preventing, or detecting
RISK ASSESSMENT & RESPONSE TO ASSESSED RISKS and correcting, material misstatements at the
assertion level.
PSA 200
-when the auditor’s assessment of RMM at the
As the basis for the auditor’s opinion, PSAs require the assertion level includes an expectation that the
auditor to obtain reasonable assurance about whether the controls are operating effectively or
financial statements are free from material misstatement,
whether due to fraud or error. -when substantive procedures alone cannot provide
sufficient appropriate audit evidence
PSA 315 RISK ASSESSMENTS (RAP)
Nature and Extent of Tests of Controls
A. The auditor should:
a. How the controls were applied at relevant
a. Identify and assess the risks of material times during the period under audit.
misstatement transactions, account balances, and
disclosures) b. The consistency with which they were
applied.
PSA 315 RISK ASSESSMENTS (RAP)
c. By whom or by what means they were
A. The auditor should: applied.
b. secure enough evidence to support the risk d. Determine whether the controls to be
assessment. tested depend upon other controls.
c. be most concerned about those business risks that Timing of Tests of Controls
may cause material misstatements.
Test controls for the particular time, or throughout the
d. use risk assessment to determine the nature, period, for which the auditor intends to rely on those
timing, and extent of further audit procedures to be controls
performed.
The auditor shall document the conclusions reached
PSA 315 RISK ASSESSMENTS (RAP) about relying on such controls that were tested in a
B. Documenting RAP previous audit.

-discussion among the engagement team on the E. RAR-Substantive Testing

susceptibility of FS to material misstatement and the
significant decisions reached
 An audit procedure designed to detect material
misstatements at the assertion level. Substantive procedures
comprise:
i. Tests of details (of classes of
transactions, account balances, and
disclosures), and
ii. Substantive analytical
procedures.
Timing of Substantive Procedures
When substantive procedures are performed at an
interim date, the auditor shall cover the remaining period
by performing:
-Substantive procedures, combined with
tests of controls for the intervening period;
or
F. Audit Documentation
a. The overall responses to address the assessed
risks of material misstatement at the financial statement
level
b. The linkage of those procedures with the assessed
risks at the assertion level; and
c. The results of the audit procedures, including the
conclusions where these are not otherwise clear
AUDIT EVIDENCES
ASSERTIONS AND AUDIT OBJECTIVES
Nature of Assertions:
• Financial statements are not statements of facts.
• They are a collection of claims and assertions, made
implicitly or explicitly by the entity’s management,
• Assertions (or management assertions) are
representations by management, explicit or
otherwise, that are embodied in the financial
statements.
• These assertions relate to the fairness of
presentation of the financial statements; thus, they
are directly related to applicable financial reporting
framework.
• Examples of assertions:
✓ All the assets exist. (Existence).
✓ All sales transactions have been recorded. (Completeness).
✓ Inventories are properly valued. (Valuation).
✓ All amounts are properly presented and disclosed in the
financial statements. (Accuracy).
Levels of Assertions:
• Financial statement level – entity’s management
representation that the financial statements as a whole are
presented fairly, in all material respects.
• Account balance or class of transactions level – entity’s
management representation that the underlying account
balances and class of transactions, including related
disclosures, are free of material misstatements.
Categories of Assertions used by the Auditor:
• Assertions about classes of transactions and events for the
period under audit
✓ Completeness – all transactions and events that
should have been recorded have been recorded.
✓ Occurrence – recorded transactions and events
have occurred and pertain to the entity.
✓ Cut off (proper period) – transactions and events
have been recorded in the correct accounting period.
✓ Accuracy – amounts and other data relating to
recorded transactions and events have been
recorded appropriately.
✓ Classification – transactions have been recorded in
the proper accounts.
Categories of Assertions used by the Auditor:
• Assertions about account balances at the period end
✓ Completeness – all assets, liabilities and equity
interests that should have been recorded have been
recorded.
✓ Valuation and allocation – assets, liabilities, and
equity interests are included in the FS at appropriate
amounts and any resulting valuation or allocation
adjustments are appropriately recorded.
✓ Existence – assets, liabilities, and equity interests
exist.
✓ Rights and obligations – the entity holds or
controls the rights to assets, and liabilities are the
obligations of the entity.
Categories of Assertions used by the Auditor:
• Assertions about presentation and disclosure
✓ Completeness all disclosures that should have
been included in the financial statements have been
included.
✓ Occurrence and rights and obligations – disclosed
events, transactions, and other matters have occurred and
pertain to the entity.
 ✓ Classification and understandability – financial
information is appropriately presented and
described, and disclosures are clearly expressed.
✓ Accuracy and valuation – financial and other
information are disclosed fairly and at appropriate
amounts.
Auditor’s Use of Relevant Assertions:
• The auditor uses relevant assertions in developing audit
objectives that will be the basis for designing audit
procedures.
• Relevant assertions are assertions that have a meaningful
bearing on whether an account is fairly stated. For example:
✓ Existence assertion, not valuation, is typically
relevant to the audit of cash account.
Audit Objectives
• The auditor develops audit objectives that relate to
management assertions about the financial statement
components.
• To achieve audit objectives, the auditor shall design audit
procedures and gather sufficient appropriate audit evidence
• Audit objectives are used to verify management assertions
Types of Audit Objectives:
• Whether general or specific:
✓ General audit objectives – are broad objectives of
auditing an account balance or class of transactions.
✓ Specific audit objectives – audit objectives stated
in terms tailored to the specific audit engagement.
• Whether substantive or compliance
✓ Substantive audit objectives – objectives that
relate to the determination of the validity of assertions
on account balances
✓ Compliance audit objectives – objectives that
relate to the degree of entity’s compliance with relevant
controls.
Audit Procedures
• Based on audit objectives, the auditor should plan and
perform audit procedures
AUDIT PROCEDURES - means for obtaining sufficient
appropriate audit evidence to satisfy financial statement
assertions and to support audit opinion on the fairness of the
financial statements.
Primary Purpose of Audit Procedures:
• Audit procedures are performed to gather necessary (not
all) corroborative evidence to achieve audit objectives in
order to result to sufficient appropriate audit evidence on the
fairness of the presentation of the entity’s financial
statements.
Nature, Timing and Extent of Audit Procedures:
• Nature of an audit procedure – refers to:
✓ Its purpose (i.e., test of controls or substantive
procedure) and
✓ Its type (i.e., inspection, observation, inquiry,
confirmation, recalculation, reperformance, or
analytical procedures).
Nature, Timing and Extent of Audit Procedures:
• Timing of an audit procedure – refers to when to perform
the audit procedure, or the period or date to which the audit
evidence applies.
✓ Audit procedures are normally performed:
▪ Early in the accounting period being
examined.
▪ Throughout the accounting period being
examined, but with emphasis of the transactions
near the end.
▪ Within one to three months after the close
of the accounting period.
✓ Audit procedures performed before period end
are known as interim work.
• Extent of an audit procedure – refers to the quantity to be
performed or the extent of testing or the number of items to
be examined.
Audit Procedures for Obtaining Audit Evidence:
• Risk assessment procedures – procedures to obtain an
understanding of the entity and its environment, including its
internal control
Risk assessment procedures include:
✓ Inquiry of management and other personnel.
✓ Analytical procedures (as a planning tool).
✓ Observation and inspection.
Audit Procedures for Obtaining Audit Evidence:
• Further audit procedures – The auditor shall design and
perform audit procedures whose nature, timing, and extent
are based on and are responsive to the assessed RMM at the
assertion level.
✓ Further audit procedures are actually audit
procedures classified according to purpose.
 ✓ In designing the further audit procedures to be
performed, the auditor shall:
▪ Consider the assessed RMM.
▪ Obtain more persuasive audit evidence
the higher the auditor’s
assessment of risk by:
• Increasing the quantity of evidence; or
• Obtain evidence that is more relevant or reliable
Further audit procedures include:
• Tests of controls (compliance tests) – audit procedures
designed to evaluate the operating effectiveness of relevant
controls in preventing, or detecting and correcting material
misstatements at the assertion level.
✓ In designing and performing tests of controls, the
auditor shall obtain more persuasive audit evidence the
higher/greater reliance the auditor places on the
effectiveness of a control.
Further audit procedures include:
• Substantive procedures – audit procedures designed to
detect material misstatements at the assertion level.
▪ Types of substantive procedures:
1) Tests of details – examining or obtaining audit evidence on
the actual details of account balance, class of transactions,
and disclosure.
• The objective of tests of details is to substantiate
or identify misstatements in the recorded amounts.
• Directional testing – refers to the direction of an
audit test.
✓ Tracing – if the auditor starts from original source
documents and traces forward to the accounting records, this
tests the assertion of completeness. This helps the auditor
identify understatement errors.
✓ Vouching –this tests the assertion of existence or
occurrence. This helps the auditor identify overstatement
errors.
Further audit procedures include:
• Substantive procedures – audit procedures designed to
detect material misstatements at the assertion level.
▪ Types of substantive procedures:
1) Tests of details – examining or obtaining audit evidence on
the actual details of account balance, class of transactions,
and disclosure.
a) Test of details of transactions – testing of
transactions which give rise to the ending balance of a given
account; these involve examining authorization, recording
and posting of transactions.
Further audit procedures include:
• Substantive procedures – audit procedures designed to
detect material misstatements at the assertion level.
▪ Types of substantive procedures:
1) Tests of details – examining or obtaining audit evidence on
the actual details of account balance, class of transactions,
and disclosure.
b) Tests of details of balances – direct testing of
accounts ending balance.
• Substantive procedures – audit procedures designed to
detect material misstatements at the assertion level.
Audit Procedures According to Types:
• Inspection – consists of examining records or documents
(whether internal or external, in paper form, or other media),
or a physical examination of an asset.
• Observation – consists of viewing/looking at a process or
procedure being performed by others.
• External confirmation – represents audit evidence obtained
by the auditor as a direct written response to the auditor
from a third party (the confirming party) in paper form, or by
electronic or other medium.
Examples of external confirmation:
✓ Confirmation of accounts receivable balances:
▪ Positive confirmation – customers should reply
whether or not they agree with their respective balances;
it is considered more effective than negative confirmation.
▪ Negative confirmation – customers should reply if
there are discrepancies.
Audit Procedures According to Types:
• Recalculation (computation) – consists of checking the
mathematical accuracy (manually or electronically) of
documents or records.
• Reperformance – involves the auditor’s independent
execution of procedures or controls that were originally
performed (by the client’s staff) as part of the entity’s internal
control.
• Analytical procedures – consist of evaluations of financial
information made by a study of plausible relationships among
both financial and non-financial data.
• Inquiry – consists of seeking information of knowledgeable
persons, both financial and non-financial, within the entity or
outside the entity.
Audit Techniques

• The auditor applies audit techniques (methods) to gather

corroborative evidence and uses his professional

AUDIT PROGRAM

Audit Program - a detailed listing of the nature, timing and

extent of planned audit procedures

Audit Evidence - all the information used by the auditor in

arriving at the conclusions

Nature of Audit Evidence:

• Accounting records (Underlying data) – accounting

records/data prepared by the client’s personnel and from
which financial statements are prepared.

• Corroborating evidence – corroborating information that

are used by the auditor to verify the fairness of the
accounting records

Sufficient Appropriate Audit Evidence

• Sufficiency – the measure of the quantity or amount of

audit evidence that the auditor shall accumulate.

• Appropriateness – measures the quality of audit evidence,

that is, its relevance and its reliability in providing support for
the conclusions

✓ Relevance – deals with the logical connection

with, or bearing upon, the purpose of audit
procedures and the assertion under consideration.

✓ Reliability – objectivity of evidence

Persuasive Evidence:

• Audit evidence is persuasive if it is sufficient both in

quantity and quality to support audit opinion. Thus,
sufficiency and appropriateness of audit evidence are the
determinants of persuasiveness of audit evidence.