Professional Documents
Culture Documents
Full Version Auditing
Full Version Auditing
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TABLE OF CONTENT
Page
Cover Page 1
Table of Content 2
Course Outline 3
Course Outline Policy 3
Course Information 6
Big Picture – Week 1 to 3 7
Unit Learning Outcome A 7
Self-Help 18
Let’s Check 18
Let’s Analyze 19
In a Nutshell 22
Q&A 23
Keywords Index 23
Unit Learning Outcomes B and C 24
Self-Help 28
Let’s Check 28
Let’s Analyze 29
In a Nutshell 31
Q&A 31
Keywords Index 31
Unit Learning Outcomes D to G 32
Self-Help 42
Let’s Check 42
Let’s Analyze 42
In a Nutshell 44
Q&A 45
Keywords Index 45
Unit Learning Outcomes H 46
Self-Help 53
Let’s Check 53
Let’s Analyze 53
In a Nutshell 55
Q&A 56
Keywords Index 56
Unit Learning Outcomes I to M 57
Self-Help 70
Let’s Check 70
Let’s Analyze 70
In a Nutshell 75
Q&A 76
Keywords Index 76
Course Schedule 77
Online Code of Conduct 77
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COURSE OUTLINE: ACP 314 – Auditing and Assurance Principles
Course Coordinator : Lord Eddie I. Aguilar
Email : aguilar_lordeddie@umindanao.edu.ph
Student Consultation : By BlackBoard LMS Message
Mobile :
Phone : c/o UM CAE 305-0645
Effectivity Date : May 25, 2020 (Summer/Term)
Mode of Delivery : Blended (On-Line with Face-to-Face or Virtual Sessions)
Time Frame : 54 Hours
Student Workload : Expected Self-Directed Learning
Requisites : ACC 221 – Intermediate Accounting 3
Credit :3
Attendance Requirements : A minimum of 95% attendance is required at all scheduled
virtual or face-to-face sessions.
Assessment Task Submission of assessment tasks shall be on the 3rd, 5th, 7th, and 9th
Submission week of the term. The assessment paper shall be attached with a cover
page indicating the title of the assessment task (if the task is a
performance), the name of the course coordinator, date of submission,
and the name of the student. The document should be emailed to the
course coordinator. It is also expected that you already paid your
tuition and other fees before the submission of the assessment task.
Turnitin Submission (if All assessment tasks are required to be submitted through Turnitin
necessary) with a maximum similarity index of 30% to ensure honesty and
authenticity. This means that if your paper goes beyond 30%, the
students will either redo her/his paper or explain in writing addressed
to the course coordinator the reasons for the similarity. In addition, if
the paper has reached more than 30% similarity index, the student
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may be called for disciplinary action in accordance with the University's
OPM on Intellectual and Academic Honesty.
Penalties for Late The score for an assessment item submitted after the designated time
Assignments/Assessments on the due date, without an approved extension of time, will be
reduced by 5% of the possible maximum score for that assessment
item for each day or part-day that the assessment item is late.
Return of Assessment tasks will be returned to you two (2) weeks after the
Assignments/Assessments submission. This will be returned by email or via the Blackboard portal.
For group assessment tasks, the course coordinator will require some
or few of the students for online or virtual sessions to ask clarificatory
questions to validate the originality of the assessment task submitted
and to ensure that all the group members are involved.
Assignment Resubmission You should request in writing addressed to the course coordinator
his/her intention to resubmit an assessment task. The resubmission is
premised on the student's failure to comply with the similarity index
and other reasonable grounds such as academic literacy standards or
other reasonable circumstances, e.g., illness, accident, financial
constraints.
Grading System All culled from BlackBoard sessions and traditional contact:
Course Discussion/Exercises – 30%
1st formative assessment – 10%
2nd formative assessment – 10%
3rd formative assessment – 10%
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Submission of the final grades shall follow the usual University system
and procedures.
Student Communication You are required to create a umindanao email account, which is
required to access the BlackBoard portal. Then, the course coordinator
will enroll the students to have access to the materials and resources
of the course. All communication formats: chat, submission of
assessment tasks, requests, etc. shall be through the portal and other
university recognized platforms.
You can meet the course coordinator in person through the scheduled
face-to-face sessions to raise your issues and concerns.
For students who have not created their student email, please contact
the course coordinator or program head.
Devzon U. Porras
(BSIA, BSAIS)
Email: dporras@umindanao.edu.ph
Phone: (082) 3050645 local 137
Jade D. Solaña
(BSA, BSMA)
Email: jd_solana@umindanao.edu.ph
Phone: (082) 3050645 local 137
Student with Special Students with special needs shall communicate with the course
Needs coordinator about the nature of their special needs. Depending on the
nature of the need, the course coordinator, with the program
coordinator's approval, may provide alternative assessment tasks or
extension of the deadline for submission of assessment tasks.
However, alternative assessment tasks should still help achieve the
desired course learning outcomes.
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Library and Information Brigida E. Bacani
Center (LIC) Resource Email: library@umindanao.edu.ph
09513766681
GSTC Facilitator
Zerdszen P. Rañises
Emai: gstcmain@umindanao.edu.ph
09058924090
Course Coordinator Voice: Hello, future auditor! Welcome to our ACP 314 course – Auditing and
Assurance Principles. This is your one of your major courses in your chosen
profession. For the past semesters, you are being oriented to the works of an
accountants. For this course, we will dwell on the works of an external auditor. You
will be doing the examination of the financial statements and discuss the result of
the examination to the key executives in the company and helping them in to come
up with a realiable financial statements.
Course Outcomes: Our goal here is for you to be acquainted with the works of an auditor examining
the financial statements. In your intermediate accounting, you learned on the
process of making a financial statements. In this course, you will learn the principles,
concepts, and processes involved in auditing, other assurance and related services as
required by the engagement standards and other regulatory, legal and ethical
pronouncements. Moreover, you are going to solve issues commonly faced by
professional accountant in the conduct of their services through case analysis.
Finally, you are going to prepare an appropriate audit report.
Let us begin!
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Big Picture
Week 1-3: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to
Big Picture:
ULO A: Describe Assurance Services and Explain the Elements of Assurance Engagement.
Metalanguage
Metalanguage is the essential term relevant to the topic. This is the operational definition to
establish a common frame of reference on how to use the term.
Adverse Opinion – is an opinion when the auditor, having obtained sufficient appropriate audit
evidence, concludes that misstatements, individually or in the aggregate, are both material and
pervasive to the financial statements.
Criteria – are the benchmarks used to evaluate or measure the subject matter.
Disclaimer of Opinion – is when the auditor is unable to obtain sufficient appropriate audit evidence
on which to base the opinion, and the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be both material and pervasive.
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alternatives, development of recommendations including actions, communications of results, and
sometimes implementation and follow-up. This is performed solely for the benefit of the client.
Intended Users – are the entity/ies for whom the practitioner prepares the assurance report.
Professional skepticism – means the practitioner makes a critical assessment, with a questioning
mind, of the validity of evidence obtained and is alert to evidence that contradicts or brings into
question the reliability of documents or representations by the responsible party.
Reasonable assurance – is a concept relating to accumulating evidence necessary for the practitioner
to conclude in relation to the subject matter information taken as a whole.
Responsible Party – is responsible for the subject matter (for a direct reporting engagement) or is
responsible for the subject matter information (the assertion) and may be responsible for the
subject matter.
Subject matter information – means the outcome of the evaluation or measurement of a subject
matter
Unqualified opinion – is an opinion expressed by the auditor when the auditor concludes that the
financial statements are prepared, in all material respects, in accordance with the applicable
financial reporting framework.
Essential Knowledge
Essential knowledge is a detailed discussion of the topic or concept.
Introduction
The framework defines and describes the elements and objectives of an assurance engagement, and
identifies engagements to which Philippine Standards on Auditing (PSAs), Philippines Standards on
Review Engagements (PSREs), and Philippine Standards on Assurance Engagements (PSAEs) apply. It
provides a frame of reference for:
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The framework does not in itself establish standards or provide procedural requirements for the
performance of assurance engagements. PSAs, PSREs, and PSAEs contain basic principles, essential
procedures and related guidance, consistent with the concepts in the framework, for the
performance of assurance engagements.
In addition to the framework and PSAs, PSREs, and PSAEs, practitioners who perform assurance
engagements are governed by
a. The Code of Ethics for Professional Accountants (the Code), which establishes fundamental
ethical principles for professional accountants; and
b. Philippine Standards on Quality Control (PSQCs), which establish standards and provide
guidance on a firm’s system of quality control.
The outcome of the evaluation or measurement of a subject matter is the information that results
from applying the criteria to the subject matter. For example:
Subject matter information means the outcome of the evaluation or measurement of a subject
matter. It is the subject matter information about which the practitioner gathers sufficient
appropriate evidence to provide a reasonable basis for expressing a conclusion in an assurance
report.
Subject matter information can fail to be properly expressed in the context of the subject matter and
the criteria, and can therefore be misstated, potentially to a material extent. This occurs when the
subject matter information does not properly reflect the application of the criteria to the subject
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matter. For example, when an entity’s financial statements do not give a true and fair view of (or
present fairly, in all material respects) its financial position, financial performance and cash flows in
accordance with International Financial Reporting Standards. Another example is when an entity’s
assertion that its internal control is effective is not fairly stated, in all material respects, based on
COSO or CoCo.
In some assurance engagements, the evaluation or measurement of the subject matter is performed
by the responsible party, and the subject matter information is in the form of an assertion by the
responsible party that is made available to the intended users. These engagements are called
“assertion-based engagements.”
In other assurance engagements, the practitioner either directly performs the evaluation or
measurement of the subject matter, or obtains a representation from the responsible party that has
performed the evaluation or measurement that is not available to the intended users. The subject
matter information is provided to the intended users in the assurance report. These engagements
are called “direct reporting engagements.”
Under this Framework, there are two types of assurance engagement a practitioner is permitted to
perform:
Reasonable assurance is a concept relating to accumulating evidence necessary for the practitioner
to conclude in relation to the subject matter information taken as a whole.
Reasonable assurance is less than absolute assurance. Reducing assurance engagement risk to zero
is very rarely attainable or cost beneficial as a result of factors such as the following:
The use of selective testing.
The inherent limitations of internal control.
The fact that much of the evidence available to the practitioner is persuasive rather than
conclusive.
The use of judgment in gathering and evaluating evidence and forming conclusions based on
that evidence.
In some cases, the characteristics of the subject matter when evaluated or measured against
the identified criteria.
Circumstances of the engagement include the terms of the engagement, including the type of
assurance engagements, the characteristics of the subject matter, the criteria to be sued, the needs
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of the intended users, responsible party and other matters like events, transactions, conditions and
practices that may have a significant effect on the engagement.
Not all engagements performed by practitioners are assurance engagements. The following are not
covered in the framework, therefore, not an assurance engagement even though performed by the
practitioners:
An engagement to perform agreed-upon procedures may involve the auditor in performing certain
procedures concerning:
a. Individual items of financial data (for example, accounts payable, accounts receivable,
purchases from related parties and sales and profits of a segment of an entity);
b. A financial statement (for example, a balance sheet), or
c. Even a complete set of financial statements.
An assurance engagement may be part of a larger engagement. For example, when a business
acquisition consulting engagement includes a requirement to convey assurance regarding historical
or prospective financial information. In such circumstances, this Framework is relevant only to the
assurance portion of the engagement, and not on the consulting services.
The following may meet the definition of assurance engagement but should not be performed in
accordance with the framework:
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Engagement Acceptance
If there is a significant limitation on the scope of the practitioner’s work, it may be unlikely that the
engagement has a rational purpose.
Specific PSAs, PSREs or PSAEs may include additional requirements that need to be satisfied before
accepting an engagement.
When a potential engagement cannot be accepted as an assurance engagement because it does not
exhibit all the characteristics in the previous paragraph, the engaging party may be able to identify a
different engagement that will meet the needs of intended users. For example:
a. If the original criteria were not suitable, an assurance engagement may still be performed if:
I. The engaging party can identify an aspect of the original subject matter for which
those criteria are suitable, and the practitioner could perform an assurance
engagement with respect to that aspect as a subject matter in its own right. In such
cases, the assurance report makes it clear that it does not relate to the original subject
matter in its entirety; or
II. Alternative criteria suitable for the original subject matter can be selected or
developed.
b. The engaging party may request an engagement that is not an assurance engagement, such
as a consulting or an agreed-upon procedures engagement.
Having accepted an assurance engagement, a practitioner may not change that engagement to a
non-assurance engagement, or from a reasonable assurance engagement to a limited assurance
engagement without reasonable justification. A change in circumstances that affects the intended
users’ requirements, or a misunderstanding concerning the nature of the engagement, ordinarily will
justify a request for a change in the engagement. If such a change is made, the practitioner does not
disregard evidence that was obtained prior to the change.
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a. A three party relationship involving a practitioner, a responsible party, and intended users;
b. An appropriate subject matter;
c. Suitable criteria;
d. Sufficient appropriate evidence; and
e. A written assurance report in the form appropriate to a reasonable assurance engagement
or a limited assurance engagement.
An assurance engagements involve three separate parties: a practitioner, a responsible party and
intended users.
The responsible party and the intended users may be from different entities or the same entity. As
an example of the latter case, in a two-tier board structure, the supervisory board may seek
assurance about information provided by the management board of that entity. The relationship
between the responsible party and the intended users needs to be viewed within the context of a
specific engagement and may differ from more traditionally defined lines of responsibility. For
example, an entity’s senior management (an intended user) may engage a practitioner to perform
an assurance engagement on a particular aspect of the entity’s activities that is the immediate
responsibility of a lower level of management (the responsible party), but for which senior
management is ultimately responsible.
The term “practitioner” is broader than the term “auditor” which relates only to practitioners
performing audit or review engagements with respect to historical financial information.
An example of when the responsible party is responsible for both the subject matter information
and the subject matter, is when an entity engages a practitioner to perform an assurance
engagement regarding a report it has prepared about its own sustainability practices.
An example of when the responsible party is responsible for the subject matter information but not
the subject matter, is when a government organization engages a practitioner to perform an
assurance engagement regarding a report about a private company’s sustainability practices that the
organization has prepared and is to distribute to intended users.
The responsible party may or may not be the party who engages the practitioner (the engaging
party).
The ‘intended users’ are the entity/ies for whom the practitioner prepares the assurance report. The
responsible party can be one of the intended users, but not the only one.
Whenever practical, the assurance report is addressed to all the intended users, but in some cases
there may be other intended users. The practitioner may not be able to identify all those who will
read the assurance report, particularly where there is a large number of people who have access to
it. In such cases, intended users may be limited to major stakeholders with significant and common
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interests. Intended users may be identified in different ways, for example, by agreement between
the practitioner and the responsible party or engaging party, or by law.
Subject Matter
The subject matter, and subject matter information, of an assurance engagement can take many
forms, such as:
Criteria
Criteria are the benchmarks used to evaluate or measure the subject matter. Criteria can be formal.
Examples for formal criteria:
For the preparation of financial statements, the criteria may be the Philippine Financial
Reporting Standards (PFRS);
when reporting on internal control, the criteria may be an established internal control
framework or individual control objectives specifically designed for the engagement; and
when reporting on compliance, the criteria may be the applicable law, regulation or
contract.
Examples of less formal criteria are an internally developed code of conduct or an agreed level of
performance (such as the number of times a particular committee is expected to meet in a year).
Suitable criteria are required for reasonably consistent evaluation or measurement of a subject
matter within the context of professional judgment. Without the frame of reference provided by
suitable criteria, any conclusion is open to individual interpretation and misunderstanding.
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Suitable criteria are context-sensitive, that is, relevant to the engagement circumstances. Even for
the same subject matter there can be different criteria. For example, one responsible party might
select the number of customer complaints resolved to the acknowledged satisfaction of the
customer for the subject matter of customer satisfaction; another responsible party might select the
number of repeat purchases in the three months following the initial purchase.
a. Relevance
Relevant criteria contribute to conclusions that assist decision-making by the intended
users.
b. Completeness
Criteria are sufficiently complete when relevant factors that could affect the conclusions in
the context of the engagement circumstances are not omitted. Complete criteria include,
where relevant, benchmarks for presentation and disclosure.
c. Reliability
Reliable criteria allow reasonably consistent evaluation or measurement of the subject
matter including, where relevant, presentation and disclosure, when used in similar
circumstances by similarly qualified practitioners.
d. Neutrality:
Neutral criteria contribute to conclusions that are free from bias.
e. Understandability:
Understandable criteria contribute to conclusions that are clear, comprehensive, and not
subject to significantly different interpretations.
Evidence
The practitioner plans and performs an assurance engagement with an attitude of professional
skepticism to obtain sufficient appropriate evidence about whether the subject matter information
is free of material misstatement. The practitioner considers materiality, assurance engagement risk,
and the quantity and quality of available evidence when planning and performing the engagement,
in particular when determining the nature, timing and extent of evidence-gathering procedures.
An attitude of professional skepticism means the practitioner makes a critical assessment, with a
questioning mind, of the validity of evidence obtained and is alert to evidence that contradicts or
brings into question the reliability of documents or representations by the responsible party.
For example, an attitude of professional skepticism is necessary throughout the engagement process
for the practitioner to reduce the risk of overlooking suspicious circumstances, of over generalizing
when drawing conclusions from observations, and of using faulty assumptions in determining the
nature, timing and extent of evidence gathering procedures and evaluating the results thereof.
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facsimiles, filmed, digitized or other electronic documents, including consideration of controls over
their preparation and maintenance where relevant.
Sufficiency is the measure of the quantity of evidence. Appropriateness is the measure of the quality
of evidence; that is, its relevance and its reliability. The quantity of evidence needed is affected by
the risk of the subject matter information being materially misstated (the greater the risk, the more
evidence is likely to be required) and also by the quality of such evidence (the higher the quality, the
less may be required). Accordingly, the sufficiency and appropriateness of evidence are interrelated.
However, merely obtaining more evidence may not compensate for its poor quality.
The reliability of evidence is influenced by its source and by its nature, and is dependent on the
individual circumstances under which it is obtained. Generalizations about the reliability of various
kinds of evidence can be made; however, such generalizations are subject to important exceptions.
Even when evidence is obtained from sources external to the entity, circumstances may exist that
could affect the reliability of the information obtained. For example, evidence obtained from an
independent external source may not be reliable if the source is not knowledgeable. While
recognizing that exceptions may exist, the following generalizations about the reliability of evidence
may be useful:
Evidence is more reliable when it is obtained from independent sources outside the entity.
Evidence that is generated internally is more reliable when the related controls are effective.
Evidence obtained directly by the practitioner (for example, observation of the application of
a control) is more reliable than evidence obtained indirectly or by inference (for example,
inquiry about the application of a control).
Evidence is more reliable when it exists in documentary form, whether paper, electronic, or
other media (for example, a contemporaneously written record of a meeting is more reliable
than a subsequent oral representation of what was discussed).
Evidence provided by original documents is more reliable than evidence provided by
photocopies or facsimiles.
Assurance Report
The practitioner provides a written report containing a conclusion that conveys the assurance
obtained about the subject matter information. PSAs, PSREs and PSAEs establish basic elements for
assurance reports.
a. In terms of the responsible party’s assertion (for example: “In our opinion the responsible
party’s assertion that internal control is effective, in all material respects, based on XYZ
criteria, is fairly stated”); or
b. Directly in terms of the subject matter and the criteria (for example: “In our opinion internal
control is effective, in all material respects, based on XYZ criteria”).
In a direct reporting engagement, the practitioner’s conclusion is worded directly in terms of the
subject matter and the criteria.
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A practitioner will not express an unqualified conclusion for either type of assurance engagement
when the following circumstances exist and, in the practitioner’s judgment, the effect of the matter
is or may be material:
a. There is a limitation on the scope of the practitioner’s work. The practitioner expresses a
qualified conclusion or a disclaimer of conclusion depending on how material or pervasive
the limitation is. In some cases the practitioner considers withdrawing from the
engagement.
b. When it is discovered that the criteria are unsuitable or the subject matter is not appropriate
for an assurance engagement. The practitioner expresses:
I. A qualified conclusion or adverse conclusion depending on how material or pervasive
the matter is, when the unsuitable criteria or inappropriate subject matter is likely to
mislead the intended users; or
II. A qualified conclusion or a disclaimer of conclusion depending on how material or
pervasive the matter is, in other cases.
Unqualified opinion is an opinion expressed by the auditor when the auditor concludes that the
financial statements are prepared, in all material respects, in accordance with the applicable
financial reporting framework.
Adverse Opinion is an opinion when the auditor, having obtained sufficient appropriate audit
evidence, concludes that misstatements, individually or in the aggregate, are both material and
pervasive to the financial statements.
Disclaim an Opinion is when the auditor is unable to obtain sufficient appropriate audit evidence on
which to base the opinion, and the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be both material and pervasive.
A practitioner is associated with a subject matter when the practitioner reports on information
about that subject matter or consents to the use of the practitioner’s name in a professional
connection with that subject matter.
If the practitioner is not associated in this manner, third parties can assume no responsibility of the
practitioner. If the practitioner learns that a party is inappropriately using the practitioner’s name in
association with a subject matter, the practitioner requires the party to cease doing so. The
practitioner also considers what other steps may be needed, such as informing any known third
party users of the inappropriate use of the practitioner’s name or seeking legal advice.
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Self-Help: You can also refer to the following sources to help you further
understand the lesson.
Philippine Framework for Assurance Engagements
https://aasc.org.ph/downloads/PSA/publications/PDFs/Philippine-Framework-for-Assurance-
Engagements.pdf
Let’s Check
EXERCISE 1
Link the correct definition to each term.
a. Accountable i. Qualified Opinion
b. Steward j. Persuasiveness of Evidence
c. Practitioner k. Compilation
d. True l. Agreed-upon procedures
e. Fair m. Auditing
f. Materiality o. Criteria
g. Assertion-based assurance report p. Reasonable Assurance
h. Disclaimer of Opinion
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10.Applies accounting and financial reporting expertise to assist management in the preparation and
presentation of financial information.
11.Being required or expected to justify actions and decisions.
12.In our opinion the responsible party’s assertion that internal control is effective, in all material
respects, based on XYZ criteria, is fairly stated”.
EXERCISE 2
TRUE OR FALSE
Let’s Analyze
Multiple Choice Questions
11.Which of the following is not one of the major categories of practitioner’s services?
a. Compilation engagement.
b. Assurance engagements on subject matters other than historical financial information.
c. Related service framework.
d. Compilation engagement.
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13.Which of the following is not one of the five elements exhibited by assurance engagements?
a. The subject matter.
b. Suitable criteria.
c. Sufficient appropriate evidence
d. A multi-party relationships.
16.Subject matter and subject matter information of an assurance engagement can take all of the
following, except:
a. Physical characteristics.
b. Non-financing performance or conditions.
c. Litigation planning.
d. Financial performance or conditions.
Involved Monitoring of
Focus on Outcomes One Party by Another
a. Yes Yes
b. Yes No
c. No Yes
d. No No
18.What is the type of assurance engagement that has as its subject matter a non-historical financial
information?
a. Special purpose engagement.
b. Agreed-upon procedures.
c. Review of financial statements.
d. Prospective financial information.
19.The following statements relate to assurance engagements. Choose the incorrect statements.
1. The objective of an assurance engagement is for a professional accountant to evaluate
or measure a subject matter that is the responsibility or another party against identified
suitable criteria, and to express a conclusion that provides the intended user with a level
of assurance about the subject matter.
2. Assurance engagements performed by professional accountants are intended to
enhance the credibility of information about a subject matter.
3. Assurance engagements involve two parties: a professional accountant and an intended
user.
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4. The subject matter of an assurance engagement is limited to historical or prospective
financial information.
5. The intended user in an assurance engagement is the person or class of persons for
whom the professional accountant prepares the report for a specific use or purpose.
a. 2, 3 ,4, and 5
b. 2, 4 and 5
c. 3 and 4
d. 1, 2, 3, and 4
20.How does the related services framework differ from the assurance framework?
a. Related services claim compliance with PSAs.
b. Related services engagements do not result in an opinion.
c. Related services enhance the degree of confidence intended users can have.
d. Related services claim compliance with PSAEs.
21.Which of the following is not true about the subject matter of an assurance engagement?
a. It is the topic about which the assurance is conducted.
b. It could be information such as financial statements, statistical information and non-financial
performance indicators.
c. It could be the Philippine Financial Reporting Standards.
d. It could be systems and processes or behavior.
23.The characteristics for assessing whether criteria are suitable are all the following, except
a. Reliability.
b. International acceptance.
c. Understandability
d. Neutrality
24.Sufficiency of evidence is
a. Evidence which is adequate.
b. The measure of the quality of evidence.
c. The measure of the quantity of evidence.
d. Evidence which is material.
26.Professional judgement is the application of relevant training, knowledge and experience, within
the context provided by ____________, in making informed decisions about the courses of action
that are appropriate in the circumstances of the audit engagement.
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a. Philippine Financial Reporting Standards.
b. Philippine Standards on Auditing.
c. The Code of Professional Ethics of an Accountants.
d. Auditing, accounting and ethical standards.
In a Nutshell
ACTIVITY 1
After learning the framework of assurance engagement, reading the articles found in the Self-Help,
and using other resources, what is the reason for a practitioners only provide reasonable assurance
and not absolute assurance ? (50 words)
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
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ACTIVITY 2
After learning the framework of assurance engagement, reading the articles found in the Self-Help,
and using other resources, describe and differentiates the difference services offered by the
practitioners? (50 words)
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
Q&A LIST
Questions/Issues Answers
1. 1.
2. 2.
3. 3.
4. 4.
5. 5.
KEYWORDS INDEX
This section lists down the keywords that help you for recall the discussions.
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PREFACE TO PHILIPPINE STANDARDS ON AUDITING, QUALITY CONTROL,
REVIEW, OTHER ASSURANCE AND RELATED SERVICES
Big Picture:
ULO B: Describe the Preface of the Philippine Standards on Auditing, Quality Control, Review,
Other Assurance and Related Services.
ULO C: Explain the Works of the Auditing and Assurance Standards Council (AASC).
Metalanguage
Metalanguage is the essential term relevant to the topic. This is the operational definition to
establish a common frame of reference on how to use the term.
AASC – is the Philippine council for the auditing and assurance standards.
Board of Accountancy – also known as the Professional Regulation Board of Accountancy (PRBOA). A
regulatory body for Accountancy professionals in the Philippines.
Exposure Draft – is a document published by the AASC to solicit comments from the public on the
proposed new auditing standards prior to its release as a final document or pronouncement.
Standards – contain basic principles and essential procedures together with related guidance in the
form of explanatory and other material, including appendices. For auditing, it is known as Philippine
Standards on Auditing (PSAs).
Essential Knowledge
Essential knowledge is a detailed discussion of the topic or concept.
Introduction
The Preface to Philippine Standards on Quality Control, Auditing, Other Assurance and Related
Services is issued to facilitate understanding of the objectives and operating procedures of the
Auditing and Assurance Standards Council (hereinafter referred to as “AASC” or “Council”) and the
scope and authority of the documents issued by the Council.
The mission of the AASC as set out in its Rules of Procedures is “the promulgation of auditing
standards, practices and procedures which shall be generally accepted by the accounting profession
in the Philippines.”
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It is the stated policy of the AASC to make the International Standards and Practice Statements
issued by the International Auditing and Assurance Standard Board (IAASB) the applicable standards
and practice statements in the Philippines.
To facilitate the implementation in the Philippines, the International Standards and Practice
Statements are made Philippine-specific and are described as “Philippine standards and practice
statements”. This process involves making Philippine-specific those paragraphs or sections in
International Standards and Practice Statements that are addressed in broad terms to the
international community as a whole to make them clearly applicable in the Philippines.
The AASC was created by the Professional Regulation Commission upon the recommendation of the
Board of Accountancy (BOA) to assist the BOA in the establishment and promulgation of auditing
standards in the Philippines. The AASC replaced the Auditing Standards and Practices Council (ASPC)
which was established by the Philippine Institute of Certified Public Accountants and the Association
of CPAs in Public Practice and previously set generally accepted auditing standards in the Philippines,
also based on International Standards and Practice Statements.
No. of Members
Chairman 1
Board of Accountancy 1
Securities and Exchange Commission 1
Commission on Audit 1
Association of CPAs in Public Practice 1
Philippine Institute of CPAs: 10
Public Practice 7
Commerce and Industry 1
Academe/Education 1
Government 1 __
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Total 15
The Chairman and the members of the AASC shall have a term of three years renewable for another
term.
As set forth in the AASC’s Rules of Procedures, “pronouncements on generally accepted auditing
standards, interpretations, and opinions issued by the AASC apply whenever an independent
examination of financial statements of any entity, whether profit-oriented or not, and irrespective of
size or legal form, when such examination is conducted for the purpose of expressing an opinion
thereon. They may also have application, as appropriate, to other related activities of auditors.”
Philippine Standards on Auditing (PSAs) are to be applied, as appropriate, in the audit of historical
financial information.
Philippine Standards on Review Engagements (PSREs) are to be applied in the review of historical
financial information.
PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the ASPC’s Engagement Standards.
Philippine Standards on Quality Control (PSQCs) are to be applied for all services falling under the
AASC’s Engagement Standards.
The AASC’s Standards contain basic principles and essential procedures (identified in bold type
lettering) together with related guidance in the form of explanatory and other material, including
appendices. The basic principles and essential procedures are to be understood and applied in the
context of the explanatory and other materials that provide guidance for their application. It is
therefore necessary to consider the whole text of a Standard to understand and apply the basic
principles and essential procedures.
The nature of the Philippine Standards issued by the AASC requires professional accountants to
exercise professional judgment in applying them. In exceptional circumstances, a professional
accountant may judge it necessary to depart from a basic principle or essential procedure of an
Engagement Standard to achieve more effectively the objective of the engagement. When such a
situation arises, the professional accountant should be prepared to justify the departure.
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be applied as written to engagements in the public sector. With respect to Philippine Standards, this
guidance is also applicable. Hence, Philippine Standards are to be applied as written to engagements
in public sector, unless so stated that they do not apply in a public sector environment or they are
not appropriate in such an environment.
Philippine Auditing Practice Statements (PAPSs) are issued to provide interpretive guidance and
practical assistance to professional accountants in implementing PSAs and to promote good practice.
Philippine Review Engagement Practice Statements (PREPSs), Philippine Assurance Engagement
Practice Statements (PAEPSs), and Philippine Related Services Practice Statements (PRSPSs) are
issued to serve the same purpose for implementation of PSREs, PSAEs and PSRSs, respectively.
Professional accountants should be aware of and consider Practice Statements applicable to the
engagement. A professional accountant who does not consider and apply the guidance included in a
relevant Practice Statement should be prepared to explain how the basic principles and essential
procedures in the Engagement Standard(s) addressed by the Practice Statement have been complied
with.
Other papers, for example Discussion Papers, are published to promote discussion or debate on
auditing, assurance and related services and quality control issues affecting the accounting
profession, present findings, or describe matters of interest relating to auditing, assurance, related
services and quality control issues affecting the accounting profession. They do not establish any
basic principles or essential procedures to be followed in audit, assurance or related services
engagements.
Approach
Working Procedures
To facilitate the initial work in adopting the existing International Standards and Practice
Statements, the AASC members have been assigned to workgroups, each with a designated group
leader. Each workgroup is assigned specific International Standards and Practice Statements, or
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IAASB’s exposure drafts, to review and has the initial responsibility for the preparation and drafting
of the exposure draft on the proposed Philippine Standard or Practice Statement for consideration
by the AASC en banc.
If approved by the AASC, the exposure draft is widely distributed to interested organizations and
persons for comment. The exposure draft shall also be published in the PICPA Accounting Times and
ACPAPP Bulletin to give it further exposure. Adequate time is allowed (generally not shorter than 90
days) for each exposure draft to be considered by the organizations and persons to whom it is sent
for comment.
Interested parties may send their comments direct to IAASB, with a copy to AASC, on exposure
drafts which are still under exposure by the IAASB. Interpretations, if issued by the AASC, need not
be exposed for comment, except when it is deemed desirable, in which case the exposure period will
normally be the same as that of a proposed Philippine Standard or Practice Statement.
Issuance of exposure drafts requires approval by a majority of the members of the Council; issuance
of final Philippine Standards and Practice Statements, as well as interpretations, requires approval of
at least ten members.
Each final Philippine Standard and Practice Statement, as well as interpretations, shall be submitted
to the Professional Regulation Commission through the Board of Accountancy for approval after
which the pronouncements shall be published in the Official Gazette. After publication, the AASC
pronouncement becomes operative from the effective date stated therein.
Philippine Standards and Practice Statements adopted from International pronouncements will use
the same numbers as their counterpart International pronouncements. Philippine Standards and
Practice Statements that are Philippine specific and are not adopted from International
pronouncements will be numbered consecutively with suffix “Ph” as follows:
Self-Help: You can also refer to the following sources to help you further
understand the lesson.
Preface to Philippine Standards on Quality Control, Auditing, Review, Other Assurance and Related
Services
https://aasc.org.ph/downloads/aasc/publications/PDFs/Preface_to_Philippine_Standards.pdf
Let’s Check
EXERCISE 3
1. PSAs, PSREs, PSAEs, PSRSs, and PSQC are collectively known as an engagement standards.
2. Exposure drafts issued by the AASC, and not coming from the IAASB, still need to be exposed for
comments within 90 days.
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3. The AASC may extend the exposure draft to more than 90 days if approved by the majority of the
council members.
4. The issuance of exposure drafts requires an approval of at least ten members.
5. All final Philippine Standards and Practice Statement including interpretations shall be submitted
to the Board of Accountancy for approval.
6. Engagement standards are under the scope of the Framework of Assurance Engagements.
7. Philippine Standards on Auditing and its practice statements are collectively called auditing
standards.
8. All existing issuance from the IAASB will be reviewed by all members of the council before
exposure drafts will be facilitated.
9. After approval of the Philippine Standards and Practice Statements, the pronouncements
becomes effective 15 days after the publication of the office gazette.
10.There will be differences between the IAASB international pronouncements and the AASC
Philippine pronouncement. AASC is mandated to make exposure drafts for the differences for
resolution.
Let’s Analyze
Multiple Choice Questions
2. How many members of AASC are needed to approve the exposed draft of Philippine Standards in
Auditing as Philippine Standards on Auditing?
a. Majority of the regular members
b. At least eight
c. At least ten
d. At least twelve
4. What is the overriding objective of the International Auditing Standards that are issued by the
International Auditing Practices Committee of the International Federation of Accountants?
a. To improve the uniformity of auditing practices and related practices services throughout the
world.
b. To override a count’s regulations governing the audit of financial statements.
c. To replace the generally accepted auditing standards.
d. To provide uniformity of specific audit procedures that are acceptable worldwide.
5. Which of the following statements about the standards on assurance engagement is (are) valid?
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I. The Philippine Standards of Assurance Engagements always apply to an assurance
engagement being performed by a professional accountant.
II. Where a professional accountant in Public Practice performs an engagements intended to
provide a high level of assurance for which no specific standards exist, the appropriately
applicable standard included in the standards on Assurance Engagements are the followed.
III. Whenever there is a conflict between the standards on Assurance Engagements and an
Existing Philippine Standards on Auditing, the professional accountant should follow the
requirements of the standard on Assurance Engagement.
a. I
b. II
c. I, II
d. II and III
6. The Auditing and Assurance Standards Council (AASC) was established by the
A. Professional Regulation Commission (PRC) upon the recommendation of the Board of
Accountancy (BOA).
B. PICPA.
C. PICPA and the Association of CPAs in Public Practice (ACPAPP).
D. International Federation of Accountants (IFAC).
7. This is published to promote discussion or debate on auditing, assurance and related services and
quality control issues affecting the accounting profession, present findings, or describe matters of
interest relating to auditing, assurance, related services and quality control issues affecting the
accounting profession.
a. Technical papers.
b. Exposure drafts.
c. Discussion papers
d. Practices statements.
9. The following statements related to Philippine Standards on Auditing. Choose the statement
that best describes the meaning of PSAs.
a. PSAs are acts to be performed by the professional accountant.
b. PSAs are measures of the quality of the professional accountant’s performance.
c. PSAs are procedures to be used to gather evidence to support management assertions.
d. PSAs always apply whenever a CPA performs an engagement.
10.A professional accountant who does not consider and apply the guidance in a relevant Practice
Statement should be prepared to
a. Explain to the Board of Accountancy tribunal why the practice statement was not complied
with.
b. Bear the consequences of such non-compliance, such as suspension or revocation of license,
plus imprisonment of not more than two years.
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c. Face the shareholders of the entity, and explain in the meeting why such practice statement
was not complied with, provided that the explanation is also put in writing, and signed in the
presence of the Chairperson of the Auditing and Assurance Standard Council.
d. Explain how the basic principles and essential procedures in the Engagement standards
addressed by the Practice Statements have been complied with.
In a Nutshell
ACTIVITY 3
After learning the preface of Philippine standards on auditing, quality control, review, other
assurance and related services, reading the articles found in the Self-Help, and using other
resources, discuss the how AASC promulgate a standards applicable to the Philippines? (50 words)
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
Q&A LIST
Questions/Issues Answers
1. 1.
2. 2.
3. 3.
4. 4.
5. 5.
KEYWORDS INDEX
This section lists down the keywords that help you for recall the discussions.
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AUDITING: An Overview
Big Picture:
ULO E: Explain How Information Risk Can be Reduced through the Examination of the Financial
Statements.
Metalanguage
Metalanguage is the essential term relevant to the topic. This is the operational definition to
establish a common frame of reference on how to use the term.
Audit Report – a medium where the auditor conveys his or her expression of opinion on the financial
statements subjected for audit or examination.
Audit Risk – is the risk that the auditor expresses an inappropriate opinion when the financial
statements are materially misstated.
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Management – is the person(s) with executive responsibility for the conduct of the entity’s
operations. For some entities in some jurisdictions, management includes some or all of those
charged with governance, for example, executive members of a governance board, or an owner-
manager.
Risk of Material Misstatement – is the risk that the financial statements are materially misstated
prior to audit.
Those Charged with Governance – are the person(s) or organization(s), for example a corporate
trustee, with responsibility for overseeing the strategic direction of the entity and obligations related
to the accountability of the entity. This includes overseeing the financial reporting process. For
some, those charged with governance may include management personnel, for example, executive
members of a governance board of a private or public sector entity, or an owner-manager.
Essential Knowledge
Essential knowledge is a detailed discussion of the topic or concept.
Auditing Defined
The American Accounting Association (AAA) developed a definition that is concise and unambiguous
and was able to capture the expanding scope of audit engagement. AAA defined auditing as:
“A systematic process of objectively obtaining and evaluating evidence regarding assertions about
economic actions and events to ascertain the degree of correspondence between these assertions
and established criteria and communicating the results to interested users.”
Auditing follows a systematic and objective process in obtaining and evaluating evidence. These
elements are particularly important to this process.
First, the process of auditing is to gather evidence to test assertions, usually made by
management, regarding financial results and transactions.
Second, the audit process is systematic. It involves steps that starts with an entity’s (client)
request for audit services and ends in giving a reasonable conclusion. A methodology must be in
place to gather audit evidence to ensure that a sufficient amount of relevant evidence is
gathered.
Third, an audit must be objective; that is, the auditor must be independent and the process of
gathering audit evidence must be unbiased. Unlike a lawyer who gathers evidence and filters
through it to present a client’s position in the best way possible, the auditor cannot be the
client’s advocate, but must objectively gather and evaluate evidence.
After the auditor systematically and objectively gathered evidence, he or she then ascertain if the
assertion (evidence gathered) conformed to the established criteria. An assertion is a positive
statement about an action, event, condition, or performance over a specified period of time. It
refers to the representation by management that is embodied in the financial statements
component, record, or system.
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To have unbiased and clear communication, criteria must exist whereby independent observers can
assess whether such assertions are appropriate. Relevant financial reporting framework provide
those criteria for financial statement audits. Other criteria exist for other kinds of audits. An
internal auditor may refer to management’s policies and procedures as useful criteria in determining
the effectiveness and efficiency of a department’s operations. An internal revenue agent (BIR
examiner) will refer to the tax code to determine if taxable income is correctly computed.
When management prepares financial statements, they are asserting that those statements are
fairly presented in accordance with applicable accounting framework. Thus, an auditor wishing to
test that assertion will obtain and evaluate evidence regarding the fairness of management-
prepared financial statements as measured against the criteria implicit in applicable accounting
framework.
The assertions embodied in the financial statements provide directions for the design of the financial
statement audit. For example, in the financial statement disclosure “Inventory…. P2,000,000”,
management makes the following assertions: Inventory physically exists (existence), inventory
pertain to the company (occurrence), includes all products on hand and in transit (completeness), the
amount and transactions are recorded appropriately (accuracy), is represented by rights of
ownership (rights and obligations), is stated at lower of cost or NRV (valuation and allocation), and is
classified properly as a current asset (presentation and disclosure).
The conclusion reached by the auditor with regards to management assertions will be
communicated to the users of financial statements in a form of a written report. This report is
known as audit report. The opinion an auditor conveys in an audit report is referred to as an
attestation or the attest function. Attestation is defined by the AICPA’s Committee on Basic Auditing
Concept is:
This simply means that attestation is a written communication that expresses an “expert” conclusion
about the reliability of a written assertion that is the responsibility of another party.
Report is of the essence to the audit or other assurance (i.e. review) engagements because they
inform users what the auditor did and the conclusion reached. To minimize misunderstandings, the
communication generally follow a prescribed format by clearly outlining the nature of the work
performed and the conclusion reached. A financial statement audit results in an audit report
directed to the shareholders or the board of directors of the client organization. The report
delineates the responsibilities of both management and the auditor, summarizes the audit process,
and expresses the auditor’s opinion on the financial statements. Most audit result in audit reports
that do not contain any reservations (qualifications) about the fairness of the organization’s
presentation of its financial results. This is known as the standard unqualified audit report and is
shown in Exhibit 1. Variations of standard unqualified audit report will be discussed later.
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Opinion
We have audited the financial statements of ABC Company (the Company), which comprise the statement of
financial position as at December 31, 20X1, and the statement of comprehensive income, statement of
changes in equity and statement of cash flows for the year then ended, and notes to the financial statements,
including a summary of significant accounting policies.
In our opinion, the accompanying financial statements present fairly, in all material respects, the financial
position of the Company as at December 31, 20X1, and its financial performance and its cash flows for the year
then ended in accordance with Philippine Financial Reporting Standards (PFRSs).
We conducted our audit in accordance with Philippine Standards on Auditing (PSAs). Our responsibilities under
those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements
section of our report. We are independent of the Company in accordance with the International Ethics
Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the
ethical requirements that are relevant to our audit of the financial statements in the Philippines, the Code of
Ethics for Professional Accountants in the Philippines (Philippine Code of Ethics), and we have fulfilled our other
ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit
of the financial statements of the current period. These matters were addressed in the context of our audit of
the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate
opinion on these matters.
Responsibilities of Management and Those Charged with Governance for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance
with PFRSs, and for such internal control as management determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, management is responsible for assessing the Company’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the going
concern basis of accounting unless management either intends to liquidate the Company or to cease
operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our
opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in
accordance with PSAs will always detect a material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with PSAs, we exercise professional judgment and maintain professional
skepticism throughout the audit. We also:
35
a. Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or
error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is
sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
b. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Company’s internal control.
c. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates
and related disclosures made by management.
d. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based
on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that
may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw attention in our auditor’s report to the related
disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However,
future events or conditions may cause the Company to cease to continue as a going concern.
e. Evaluate the overall presentation, structure and content of the financial statements, including the
disclosures, and whether the financial statements represent the underlying transactions and events in a
manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope
and timing of the audit and significant audit findings, including any significant deficiencies in internal control
that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with them all relationships and other matters that
may reasonably be thought to bear on our independence, and where applicable, related safeguards.
From the matters communicated with those charged with governance, we determine those matters that were
of most significance in the audit of the financial statements of the current period and are therefore the key
audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public
disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not
be communicated in our report because the adverse consequences of doing so would reasonably be expected
to outweigh the public interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor’s report is *name].
[Signature in the name of the audit firm, the personal name of the auditor, or both, as appropriate]
[Auditor Address]
[Date]
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An Audit of Financial Statements
The purpose of an audit is to enhance the degree of confidence of intended users in the financial
statements. This is achieved by the expression of an opinion by the auditor on whether the financial
statements are prepared, in all material respects, in accordance with an applicable financial
reporting framework. In the case of most general purpose frameworks, that opinion is on whether
the financial statements are presented fairly, in all material respects, in accordance with the
framework. An audit conducted in accordance with PSAs and relevant ethical requirements enables
the auditor to form that opinion.
The auditor’s opinion on the financial statements deals with whether the financial statements are
prepared, in all material respects, in accordance with the applicable financial reporting framework.
Such an opinion is common to all audits of financial statements. The auditor’s opinion therefore
does not assure, for example, the future viability of the entity nor the efficiency or effectiveness with
which management has conducted the affairs of the entity.
An audit in accordance with PSAs is conducted on the premise that management and, where
appropriate, those charged with governance have responsibility:
a. For the preparation and presentation of the financial statements in accordance with the
applicable financial reporting framework; this includes the design, implementation and
maintenance of internal control relevant to the preparation and presentation of financial
statements that are free from material misstatement, whether due to fraud or error; and
c. Identify the applicable financial reporting framework, the preparation and presentation of
the financial statements in accordance with that framework, and adequate desription of that
framework to the financial statements.
The applicable financial reporting framework often encompasses financial reporting standards
established by a recognized standards setting organization. In the Philippines, the accounting
standard setting body is the Financial Reporting Standard Council (FRSC). This is the financial
reporting framework adopted by management and, where appropriate, those charged with
governance in the preparation and presentation of the financial statements that is acceptable in
view of the nature of the entity and the objective of the financial statements. At present, the FRSC
issued three frameworks:
The audit of the financial statements does not relieve management or those charged with
governance of those responsibilities.
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Basis of Auditor’s Opinion
As the basis for the auditor’s opinion, PSAs require the auditor to obtain reasonable assurance about
whether the financial statements as a whole are free from material misstatement, whether due to
fraud or error. Reasonable assurance is a high level of assurance. It is obtained when the auditor has
obtained sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.
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.
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain
absolute assurance that the financial statements are free from material misstatement due to fraud
or error. This is 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.
There are practical and legal limitations on the auditor’s ability to obtain audit evidence.
For example:
There is the possibility that management or others may not provide, intentionally or
unintentionally, the complete information that is relevant to the preparation and
presentation of the financial statements or that has been requested by the auditor.
Accordingly, the auditor cannot be certain of the completeness of information, even though
the auditor has performed audit procedures to obtain assurance that all relevant
information has been obtained.
Fraud may involve sophisticated and carefully organized schemes designed to conceal it.
Therefore, audit procedures used to gather audit evidence may be ineffective for detecting
an intentional misstatement that involves, for example, collusion to falsify documentation
38
which may cause the auditor to believe that audit evidence is valid when it is not. The
auditor is neither trained as nor expected to be an expert in the authentication of
documents.
An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor is
not given specific legal powers, such as the power of search, which may be necessary for
such an investigation.
The matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to omit an
audit procedure for which there is no alternative or to be satisfied with audit evidence that is less
than persuasive. Appropriate planning assists in making sufficient time and resources available for
the conduct of the audit. Notwithstanding this, the relevance of information, and thereby its value,
tends to diminish over time, and there is a balance to be struck between the reliability of
information and its cost. Therefore, there is an expectation by users of financial statements that the
auditor will form an opinion on the financial statements within a reasonable period of time and at a
reasonable cost, recognizing that it is impracticable to address all information that may exist or to
pursue every matter exhaustively on the assumption that information is in error or fraudulent until
proved otherwise.
Human Factor
Human weaknesses, such as fatigue and carelessness, can cause auditors to overlook pertinent
evidence, examine the wrong type of evidence, or draw the wrong conclusions from the evidence
examined.
In conducting an audit of financial statements, the overall objectives of the auditor are:
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
respects, in accordance with an applicable financial reporting framework; and
In all cases when reasonable assurance cannot be obtained and a qualified opinion in the auditor’s
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.
Information Risk
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Businesses makes decisions every day - decision to purchase or sell goods or services, borrowed
money, hiring of employees, entering into an agreements with other entities. These decisions
require quality of information since it affects business risks. Business risk is a risk that an entity will
fail to meet its objectives, which is to earn profits.
To minimize these risks, decision makers should be provided with timely, relevant, and reliable
information. A further complication in effective decision making is the presence of information risk.
Information risk reflects the possibility that the information upon which the business risk decision
was made was inaccurate or misleading. A likely cause of information risk the possibility of
inaccurate financial statements. This demand of reliable information give rise to the demand for
auditing.
Conflicts of Interests
A company’s financial statements are prepared by its directors and these directors are essentially
reporting on their own performance. Users of the financial statements want the statements to
portray the company’s financial performance, position, and cash flows as accurately as possible.
However, they perceive that the directors may bias their report so that it reflects favorably on their
management of the company’s affairs.
Thus, it can be seen that there is a potential conflict of interest between the preparers and users of
the financial statements. The audit plays a vital role in helping to ensure that directors provide, the
users are confident in receiving information which is a fair representation of the company’s financial
affairs.
If users of a company’s external financial statements base their decision on unreliable information,
they may suffer serious financial loss as a result. Therefore, before making decisions on financial
statement information, they wish to be assured that the information is reliable and safe to act upon.
Remoteness
In general, as a consequence of legal, physical and economic factors, users of company’s external
financial statements are not able to verify for themselves the reliability of the information contained
in the financial statements. Even if, for example, they are major shareholders in the company, they
have no legal right to access to the company’s books and records. Further, they may be many miles
distant from the company which prevents easy access to it, and/or they may not be able to afford
the time and expense which would be involved in checking the information personally, should they
have the legal right to do so.
As a result of legal, physical and economic factors preventing users of external financial statements
from examining personally the information provided by a company’s directors, an independent party
is needed to assess the reliability of the information of their behalf.
Complexity
40
As companies have grown in size, the volume of their transactions has increased. Further, especially
in recent years, economic transactions, and the accounting systems which capture and process
them, have become very complex. As a result of these changes, errors are more likely to creep into
the accounting data and the resulting financial statements. Additionally, with the increasing
complexity of transactions, accounting systems, and financial statements, users of external financial
statements are less able to evaluate the quality of the information for themselves. Therefore, there
is a growing need for the financial statements to be examined by an independent qualified auditor,
who has the necessary competence and expertise to understand the entity’s business, its
transactions, and its accounting system
The definition of audit that we previously discussed is referred to the financial statements audit. Its
objective, as provided in PSA 200, is to enable the auditor to express an opinion whether the
financial statements are prepared, in all material respects, in accordance with an established
accounting framework. This type of audit is normally done by a licensed and accredited Certified
Public Accountant (CPA). His or her responsibility is to examine the client’s financial statement and
gather sufficient appropriate evidence to render an opinion regarding the client’s financial
statements.
Operational Audit
Operational auditors ask such questions as: Have specific policies and objectives been defined? Are
established policies being followed and are established objectives being met? Are desired results
being obtained? Thus, operational auditing is concerned with why transactions occur in the first
place and whether there are economical alternatives.
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Compliance Audit
All audits are, in a sense, a form of compliance audit. In financial audits, a determination is made of
whether financial statements comply with generally accepted accounting principles. In operational
audits, a determination is made of whether an entity’s performance conforms with standard of
efficiency developed by management or the operational auditor. In the auditing literature, however,
compliance audit has a narrower definition. It refers to the determination of whether transactions
and events conform to laws and regulations. Compliance audit has added significance in audits of
government entities because generally, there are more compliance requirements than in audit of
non-government entities.
The purpose of compliance audit is to determine whether the auditee is following specific
procedures, rules, or regulations set down by higher authority. The criteria could be a law
prohibiting bribes or a code and accompanying regulations (such as the National Internal Revenue
Code). The audit of income tax return is a prime example of compliance audit in which the Bureau
of Internal Revenue is determining a person’s or entity’s adherence to tax regulation.
Self-Help: You can also refer to the following sources to help you further
understand the lesson.
Philippine Standard on Auditing 200 (Revised and Redrafted) – Overall Objectives of the
Independent Auditor and the Conduct of an Audit in Accordance with Philippine Standards on
Auditing
https://aasc.org.ph/downloads/PSA/publications/PDFs/PSA-200-Revised-and-Redrafted.pdf
Philippine Standard on Auditing 700 (Redrafted) – Forming an Opinion and Reporting on Financial
Statements
https://aasc.org.ph/new_std_sept2016/PSA%20700%20(Revised)%20-%20clean.pdf
Louwers, T. J., Blay, A. D., Sinason, D. H., Strawser, J. R. & Thibodeau, J. C. (2018). Auditing and
Assurance Services. 17th Edition. New York: McGraw-Hill Education.
Whittington, R. O. and Pany K. (2020). Principles of Auditing & Other Assurance Services. 20 th
Edition. New York: McGraw-Hill Education.
Let’s Check
EXERCISE 4
Identification
_________________1. It deals with whether the financial statements are prepared, in all material
respects, in accordance with the applicable financial reporting framework. Such an opinion is
common to all audits of financial statements.
42
_________________4. This is achieved by the expression of an opinion by the auditor on whether
the financial statements are prepared, in all material respects, in accordance with an applicable
financial reporting framework.
Let’s Analyze
Multiple Choice Questions
2. S1 Information risk refers to the risk that the auditor may express an unqualified opinion on the
financial statements when in fact the financial statements are materially misstated
S2 The biases and motives of the information provider may be a cause of information risk
S3 The assumption underlying an audit of financial statements is that they will be used by
different groups for similar purposes
a. False, false, true
b. False, true, false
c. False, true, true
d. True, false, false
4. Which of the following statements does not describe a condition that creates a demand for
auditing?
a. Conflict between an information preparer and a user can result in biased information
b. Information can have a substantial economic consequences for a decision maker
c. Expertise is often required for information preparation and verification
d. Users can directly assess the quality of information
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6. The primary goal of the CPA in performing the attest function is to
a. Investigate the incidence of fraud
b. Examine all the individual transactions for his to issue an opinion about the fairness of
presentation of an entity’s financial statements
c. Determine whether the client’s assertions that are embodied in the financial statements are
fairly presented
d. Prevent an issuance of improperly prepared financial statements
7. The concept of reasonable assurance as expressed by the auditor on his report means
a. The auditor just considers material misstatements when he prepares his audit report.
b. It indicates that the auditor is not an insurer or guarantor of the correctness of the financial
statements.
c. The cost of doing the audit should not exceed the professional fee charged.
d. The auditor has to observe reasonable care when he performs the audit and prepares his
audit report.
8. S1 A typical objective of an operational audit is for the auditor to determine whether the
financial statements fairly present the entity’s financial position, results of operations and cash
flows
S2 In performing compliance audits, a CPA issues a report on the degree of compliance with the
criteria used for the engagement (for example, laws, rules or regulations which have been set by
the auditor)
S3 Independent auditors are expected by management to be experts who actively participate in
management decision-making.
a. False, false, true c. False, true, false
b. True, false, false d. False, false, false
10. Compliance auditing often extends beyond audits leading to the expression of opinion on the
fairness of financial presentation and includes audits of efficiency, economy, effectiveness, as
well as
a. Accuracy.
b. Evaluation.
c. Adherence to specific rules or procedures.
d. Internal control.
In a Nutshell
ACTIVITY 4
After learning the overview of auditing, reading the articles found in the Self-Help, and using other
resources, discuss nature and characteristics of the framework for full PFRS, PFRS for SMEs, and
PFRS for Small Entities? (50 words)
44
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
ACTIVITY 5
After learning the overview of auditing, reading the articles found in the Self-Help, and using other
resources, discuss the factors that may make an audit necessary and potentially valuable for the
company based on the situation given below. Make sure to consider the concept of information risk?
(50 words)
Charmaine Flowers, a small grower of tropical flowers in Davao City is planning to expand its
business to other parts in the Philippines. Sales for the past five years of operation has been steadily
growing with all the innovations introduce by Charmaine, the owner, to the business. So far, the
company has no debt. The expansion requires a huge amount of capital through loans. The
expansion will also limit the involvement of Charmain to the day-to-day operations of the business
especially in areas far from Davao City.
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
Q&A LIST
Questions/Issues Answers
1.
2.
3.
4.
5.
KEYWORDS INDEX
This section lists down the keywords that help you for recall the discussions.
45
Compliance Audit Those Charged with Governance
Cost-Benefit Relationship (Reasonable
Assurance Concept)
Big Picture:
ULO H: Explain the Quality Control for Audits of Historical Financial Information.
Metalanguage
Metalanguage is the essential term relevant to the topic. This is the operational definition to
establish a common frame of reference on how to use the term.
Engagement partner – is the partner or other person in the firm who is responsible for the audit
engagement and its performance, and for the auditor’s report that is issued on behalf of the firm.
Engagement quality control reviewer – is a partner, other person in the firm, suitably qualified
external person, or a team made up of such individuals, none of whom is part of the engagement
team, with sufficient and appropriate experience and authority to objectively evaluate the significant
judgments the engagement team made and the conclusions it reached in formulating the auditor’s
report.
Engagement team – is all partners and staff performing the engagement, and any individuals
engaged by the firm or a network firm who perform audit procedures on the engagement. This
excludes an auditor’s external expert engaged by the firm or a network firm.
46
Listed entity – is an entity whose shares, stock or debt are quoted or listed on a recognized stock
exchange, or are marketed under the regulations of a recognized stock exchange or other equivalent
body.
Monitoring – is a process comprising an ongoing consideration and evaluation of the firm’s system of
quality control, including a periodic inspection of a selection of completed engagements, designed to
provide the firm with reasonable assurance that its system of quality control is operating effectively.
Partner – is any individual with authority to bind the firm with respect to the performance of a
professional services engagement.
Professional standards – Philippine Standards on Auditing (PSAs) and relevant ethical requirements.
Quality Control – are set of policies and procedures implemented by the CPA firm to provide
reasonable assurance that the firm and its personnel comply with professional standards and reports
issued by the firm is appropriate in the circumstances.
Staff – professionals, other than partners, including any experts the firm employs.
Suitably qualified external person – is an individual outside the firm with the competence and
capabilities to act as an engagement partner, for example a partner of another firm, or an employee
(with appropriate experience) of either a professional accountancy body whose members may
perform audits of historical financial information or of an organization that provides relevant quality
control services.
Essential Knowledge
Essential knowledge is a detailed discussion of the topic or concept.
Quality control systems, policies and procedures are the responsibility of the audit firm. Under PSQC
1 (Redrafted), the firm has an obligation to establish and maintain a system of quality control to
provide it with reasonable assurance that:
a. The firm and its personnel comply with professional standards and regulatory and legal
requirements; and
b. The reports issued by the firm or engagement partners are appropriate in the
circumstances.
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Within the context of the firm’s system of quality control, engagement teams have a responsibility
to implement quality control procedures that are applicable to the audit engagement and provide
the firm with relevant information to enable the functioning of that part of the firm’s system of
quality control relating to independence.
Engagement teams are entitled to rely on the firm’s system of quality control. Unless information
provided by the firm or other parties suggests otherwise. the engagement team may rely on the
firm’s system of quality control in relation to, for example:
The standard does not require a specific quality control procedures. The specific quality control of a
CPA firm depends on the size of the firm and the nature of the firm’s practice.
PSQC 1 (Redrafted), deals with the firm’s responsibilities to establish and maintain its system of
quality control for audit engagements. The system of quality control includes policies and
procedures that address each of the following elements:
The elements of quality control are regarded as the areas that is consider as desirable for CPA firm
to establish quality control procedures.
The engagement partner shall take responsibility for the overall quality on each audit engagement to
which that partner is assigned. The actions of the engagement partner and appropriate messages to
the other members of the engagement team, in taking responsibility for the overall quality on each
audit engagement, emphasize:
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b. The fact that quality is essential in performing audit engagements.
Throughout the audit engagement, the engagement partner shall remain alert, through observation
and making inquiries as necessary, for evidence of non- compliance with relevant ethical
requirements by members of the engagement team. The Philippine Ethics Code establishes the
fundamental principles of professional ethics, which include:
a. Integrity;
b. Objectivity;
c. Professional competence and due care;
d. Confidentiality; and
e. Professional behavior.
If matters come to the engagement partner’s attention through the firm’s system of quality control
or otherwise that indicate that members of the engagement team have not complied with relevant
ethical requirements, the engagement partner, in consultation with others in the firm, shall
determine the appropriate action.
A good procedure for this element is the annual written confirmation of compliance on
independence policies to all engagement team members.
The engagement partner shall be satisfied that appropriate procedures regarding the acceptance
and continuance of client relationships and audit engagements have been followed, and shall
determine that conclusions reached in this regard are appropriate.
PSQC 1 (Redrafted) requires the firm to obtain information considered necessary in the
circumstances before accepting an engagement with a new client, when deciding whether to
continue an existing engagement, and when considering acceptance of a new engagement with an
existing client. Information such as the following assists the engagement partner in determining
whether the conclusions reached regarding the acceptance and continuance of client relationships
and audit engagements are appropriate:
The integrity of the principal owners, key management and those charged with governance
of the entity;
Whether the engagement team is competent to perform the audit engagement and has the
necessary capabilities, including time and resources;
Whether the firm and the engagement team can comply with relevant ethical requirements;
and
Significant matters that have arisen during the current or previous audit engagement, and
their implications for continuing the relationship.
If the engagement partner obtains information that would have caused the firm to decline the audit
engagement had that information been available earlier, the engagement partner shall
49
communicate that information promptly to the firm, so that the firm and the engagement partner
can take the necessary action.
Human Resources
The engagement partner shall be satisfied that the engagement team, and any auditor’s experts who
are not part of the engagement team, collectively have the appropriate competence and capabilities
to:
a. Perform the audit engagement in accordance with professional standards and regulatory
and legal requirements; and
b. Enable an auditor’s report that is appropriate in the circumstances to be issued.
When considering the appropriate competence and capabilities expected of the engagement team
as a whole, the engagement partner may take into consideration such matters as the team’s:
Understanding of, and practical experience with, audit engagements of a similar nature and
complexity through appropriate training and participation.
Understanding of professional standards and regulatory and legal requirements.
Technical expertise, including expertise with relevant information technology and
specialized areas of accounting or auditing.
Knowledge of relevant industries in which the client operates.
Ability to apply professional judgment.
Understanding of the firm’s quality control policies and procedures.
Engagement Performance
a. The direction, supervision and performance of the audit engagement in compliance with
professional standards and regulatory and legal requirements; and
b. The auditor’s report being appropriate in the circumstances.
Direction of the engagement team involves informing the members of the engagement team of
matters such as:
Their responsibilities, including the need to comply with relevant ethical requirements, and
to plan and perform an audit with professional skepticism as required by PSA 200 (Revised
and Redrafted).
Responsibilities of respective partners where more than one partner is involved in the
conduct of an audit engagement.
The objectives of the work to be performed.
The nature of the entity’s business.
Risk-related issues.
Problems that may arise.
50
The detailed approach to the performance of the engagement.
Discussion among members of the engagement team allows less experienced team members to
raise questions with more experienced team members so that appropriate communication can occur
within the engagement team. Appropriate teamwork and training assist less experienced members
of the engagement team to clearly understand the objectives of the assigned work.
Reviews
On or before the date of the auditor’s report, the engagement partner shall, through a review of the
audit documentation and discussion with the engagement team, be satisfied that sufficient
appropriate audit evidence has been obtained to support the conclusions reached and for the
auditor’s report to be issued.
Timely reviews of the following by the engagement partner at appropriate stages during the
engagement allow significant matters to be resolved on a timely basis to the engagement partner’s
satisfaction on or before the date of the auditor’s report:
The engagement partner need not review all audit documentation, but may do so. However, as
required by PSA 230 (Redrafted), the partner documents the extent and timing of the reviews.
Consultation
51
c. Be satisfied that the nature and scope of, and conclusions resulting from, such consultations
are agreed with the party consulted; and
d. Determine that conclusions resulting from such consultations have been implemented.
For audits of financial statements of listed entities, and those other audit engagements, if any, for
which the firm has determined that an engagement quality control review is required, the
engagement partner shall:
PSA 700 (Redrafted) requires the auditor’s report to be dated no earlier than the date on which the
auditor has obtained sufficient appropriate evidence on which to base the auditor’s opinion on the
financial statements. In cases of an audit of financial statements of listed entities or when an
engagement meets the criteria for an engagement quality control review, such a review assists the
auditor in determining whether sufficient appropriate evidence has been obtained.
Conducting the engagement quality control review in a timely manner at appropriate stages during
the engagement allows significant matters to be promptly resolved to the engagement quality
control reviewer’s satisfaction on or before the date of the auditor’s report.
Differences of Opinion
If differences of opinion arise within the engagement team, with those consulted or, where
applicable, between the engagement partner and the engagement quality control reviewer, the
engagement team shall follow the firm’s policies and procedures for dealing with and resolving
differences of opinion.
Monitoring
An effective system of quality control includes a monitoring process designed to provide the firm
with reasonable assurance that its policies and procedures relating to the system of quality control
are relevant, adequate, and operating effectively. The engagement partner shall consider the results
of the firm’s monitoring process as evidenced in the latest information circulated by the firm and, if
applicable, other network firms and whether deficiencies noted in that information may affect the
audit engagement.
Documentation
a. Issues identified with respect to compliance with relevant ethical requirements and how
they were resolved.
52
b. Conclusions on compliance with independence requirements that apply to the audit
engagement, and any relevant discussions with the firm that support these conclusions.
c. Conclusions reached regarding the acceptance and continuance of client relationships and
audit engagements.
d. The nature and scope of, and conclusions resulting from, consultations undertaken during
the course of the audit engagement.
The engagement quality control reviewer shall document, for the audit engagement reviewed, that:
a. The procedures required by the firm’s policies on engagement quality control review have
been performed;
b. The engagement quality control review has been completed on or before the date of the
auditor’s report; and
c. The reviewer is not aware of any unresolved matters that would cause the reviewer to
believe that the significant judgments the engagement team made and the conclusions they
reached were not appropriate.
Self-Help: You can also refer to the following sources to help you further
understand the lesson.
Philippine Standard on Auditing 220 (Redrafted) – Quality Control for an Audit of Financial
Statements
https://aasc.org.ph/downloads/PSA/publications/PDFs/PSA-220-Redrafted.pdf
Louwers, T. J., Blay, A. D., Sinason, D. H., Strawser, J. R. & Thibodeau, J. C. (2018). Auditing and
Assurance Services. 17th Edition. New York: McGraw-Hill Education.
Whittington, R. O. and Pany K. (2020). Principles of Auditing & Other Assurance Services. 20 th
Edition. New York: McGraw-Hill Education.
Let’s Check
EXERCISE 5
True or False
1. An engagement quality control review is required for all completed audit engagement.
2. Promotion of a culture of quality is related to the element of monitoring.
3. Quality controls are policies and procedures adopted by a firm to provide a reasonable
assurance that the audits done by the firm is being carried out in accordance with the objective
and general principles governing an audit of financial statements.
4. The primary purpose of establishing quality control policies and procedures for deciding
whether to accept or reject a new client is to minimize the likelihood of a firm associating with
clients whose management lacks integrity.
53
5. The audit work performed by assistants should be reviewed to determine whether it was
adequately formed and to evaluate whether the results are consistent with the conclusions to
be presented in the auditor’s report.
6. The Philippine Standards on Quality Control (PSCQs) are to be applied to all services that fall
under the AASC’s engagement standards.
7. In reviewing the audit work performed, the engagement partner need not review all audit
documentation, but may do so.
8. An engagement quality control review ordinarily involves discussion with the engagement
partner, a review of the financial statements or other subject matter information and the
report, and, in particular, consideration of whether the report is appropriate.
9. The firm should obtain written confirmation of compliance with its policies and procedures on
independence from all firm personnel required to be independent by relevant ethical
requirements at least annually.
10. The review conducted by the quality control reviewer reduces the responsibilities of the
engagement partner.
Let’s Analyze
Multiple Choice Questions
2. The firm’s system of quality control should include policies and procedures that address each of
the following, except
a. Control environment.
b. Human resources.
c. Relevant ethical requirements.
d. Monitoring.
3. In pursuing a firm’s quality control objectives, a firm should adopt policies and procedures to
enable it to identify and evaluate circumstances and relationships that create threats to
independence, and to take appropriate action to eliminate those threats or reduce them to an
acceptable level by applying safeguards, or, if considered appropriate, to withdraw from the
engagement. Which quality control element would this be most likely to satisfy?
a. Ethical requirements
b. Human resources
c. Monitoring
d. Leadership responsibilities for quality within the firm
54
a. Preparation of the management letter.
b. Follow-up procedures performed in compliance with generally accepted auditing
standards.
c. The conference held with the client prior to issuing the audit report.
d. A post engagement review performed as part of the firm’s quality control inspection
program.
6. A requirement that working papers be reviewed by the supervision, and any deficiencies be
discussed with the preparer is an example of a quality control procedure in the area of
a. Acceptance and continuance of client relationships and specific engagements.
b. Human resources.
c. Relevant ethical requirements.
d. Engagement performance.
7. The objective of quality control mandates that a public accounting firm should establish policies
and procedures for professional development which provide reasonable assurance that all
entry-level personnel
a. Prepare working papers which are standardized in form and content.
b. Have the knowledge required to enable them to fulfill responsibilities assigned.
c. Will advance within the organization.
d. Develop specialties in specific areas of public accounting.
8. In pursuing a firm’s quality control objectives, a firm should adopt policies and procedures to
enable it to identify and evaluate circumstances and relationships that create threats or reduce
them to an acceptable level by applying safeguards, or, if considered appropriate, to withdraw
from the engagement. Which quality control element would be most likely to satisfy?
a. Monitoring.
b. Ethical requirements
c. Human resources
d. Acceptance and continuance of client relationships.
9. Maintaining or providing access to adequate reference libraries and other authoritative sources
is a procedure that is most likely performed to comply with the policy on
a. Assignment. c. Monitoring
b. Consultation. d. Supervision.
10. The work performed by the assistants should be reviewed by personnel of at least equal
competence to consider all of the following, except:
a. The objectives of the audit have been achieved.
b. The work was adequately performed and documented.
c. The conclusions expressed are consistent with the results of the work performed.
d. The engagement personnel maintained independence in the performance of the
examination.
In a Nutshell
ACTIVITY 6
After learning the quality control for an audit of financial statements, reading the articles found in
the Self-Help, and using other resources, prepare a concept map in order to summarize the key
areas of quality control?
55
Q&A LIST
Questions/Issues Answers
1. 1.
2. 2.
3. 3.
4. 4.
5. 5.
KEYWORDS INDEX
This section lists down the keywords that help you for recall the discussions.
56
Review
Engagement Quality Control Network Firm
Reviewer
AUDIT PLANNING
Big Picture:
ULO J: Describe the Need to Maintain Professional Skepticism when Conducting an Audit.
ULO K: Make a Client Acceptance Decision and Perform Initial Audit Planning.
Metalanguage
Metalanguage is the essential term relevant to the topic. This is the operational definition to
establish a common frame of reference on how to use the term.
Audit Documentation – the record of audit procedures performed, relevant audit evidence obtained,
and conclusions the auditor reached. Also known as working papers or workpapers.
Audit File – one or more folders or other storage media, in physical or electronic form, containing
the records that comprise the audit documentation for a specific engagement.
Audit Plan – is more detailed than the overall audit strategy in that it includes the nature, timing and
extent of audit procedures to be performed by engagement team members.
57
Code of Ethics – sets out the fundamental principles of ethics, reflecting the professional’s
recognition of its responsibility to the public.
Engagement Letter – is a medium where the auditor and the client sets out their understanding on
the audit engagement.
Internal Control – as defined by the COSO “is a process effected by an entity’s board of directors,
management and other personnel designed to provide reasonable assurance of the achievement of
objectives in the following categories:
a. Operational Effectiveness and Efficiency
b. Financial Reporting Reliability
c. Applicable Laws and Regulations Compliance
Overall Audit Strategy – sets the scope, timing and direction of the audit, and that guides the
development of the audit plan
Essential Knowledge
Essential knowledge is a detailed discussion of the topic or concept.
Exhibit 2 illustrates an overview of the whole audit process. We will be using this overview all
throughout the discussion of the audit engagement. As discussed previously, auditing consist of a
systematic process of evidence gathering with the aim of expressing an opinion on the financial
statements. The process starts with the decision whether to accept or reject a client to the issuance
of the audit report. Each of this process will be discussed thoroughly in this self-instructional manual
(SIM).
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PRE-PLANNING PHASE
Accept or Reject a Client? Assess Compliance to Ethical Setting the Terms of Engagement
Requirements
PLANNING
Risk Assessment Other Considerations in
Audit Strategy Audit Plan
Procedures Planning
COMPLETION OF AUDIT
Planning an audit involves establishing the overall audit strategy for the engagement and developing
an audit plan. Adequate planning benefits the audit of financial statements in several ways, including
the following (PAS 300, par 2):
a. Helping the auditor to devote appropriate attention to important areas of the audit.
b. Helping the auditor identify and resolve potential problems on a timely basis.
c. Helping the auditor properly organize and manage the audit engagement so that it is
performed in an effective and efficient manner.
d. Assisting in the selection of engagement team members with appropriate levels of
capabilities and competence to respond to anticipated risks, and the proper assignment of
work to them.
e. Facilitating the direction and supervision of engagement team members and the review of
their work.
f. Assisting, where applicable, in coordination of work done by auditors of components and
experts.
The nature and extent of planning activities will vary according to the size and complexity of the
entity, the key engagement team members’ previous experience with the entity, and changes in
circumstances that occur during the audit engagement.
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often
begins shortly after the completion of the previous audit and continues until the completion of the
current audit engagement. Planning, however, includes consideration of the timing of certain
activities and audit procedures that need to be completed prior to the performance of further audit
procedures. For example, planning includes the need to consider, prior to the auditor’s identification
and assessment of the risks of material misstatement, such matters as:
59
Obtaining a general understanding of the legal and regulatory framework applicable to the
entity and how the entity is complying with that framework.
The determination of materiality.
The involvement of experts.
The performance of other risk assessment procedures.
The auditor may decide to discuss elements of planning with the entity’s management to facilitate
the conduct and management of the audit engagement. For example, to coordinate some of the
planned audit procedures with the work of the entity’s personnel. Although these discussions often
occur, the overall audit strategy and the audit plan remain the auditor’s responsibility.
When discussing matters included in the overall audit strategy or audit plan, care is required in order
not to compromise the effectiveness of the audit. For example, discussing the nature and timing of
detailed audit procedures with management may compromise the effectiveness of the audit by
making the audit procedures too predictable.
The engagement partner and other key members of the engagement team shall be involved in
planning the audit, including planning and participating in the discussion among engagement team
members. Their involvement in planning the audit draws on their experience and insight, thereby
enhancing the effectiveness and efficiency of the planning process (PAS 300, par 5).
The potential conflict of interest between the client and users, along with some issues of frauds in
the financial statements leads the users to be naturally skeptic. This is the reason users are
dependent on the information provided by an auditor. Independent auditors are objective
intermediaries that lends credibility to the financial statements after it was examined by them. And
being an objective intermediaries between the preparers and users of information found in the
financial statements, the auditor shall conduct the audit engagement with professional skepticism.
As discussed previously, the auditor plans and performs an engagement with an attitude of
professional skepticism. This means that auditor makes a critical assessment, with a questioning
mind, of the validity of evidence obtained and is alert to evidence on the contrary. This attitude is
necessary throughout the entire audit process to reduce the risk of overlooking suspicious
situations, of over generalizing when drawing a conclusions, and of using faulty assumptions in
determining the nature, timing and extent in gathering audit evidence and in evaluating the results.
Preliminary Engagement Activities
The auditor shall undertake the following activities at the beginning of the current audit engagement
(PAS 300, par 6):
a. Performing procedures required by PSA 220 regarding the continuance of the client
relationship and the specific audit engagement;
b. Evaluating compliance with relevant ethical requirements, including independence, in
accordance with PSA 220; and
c. Establishing an understanding of the terms of the engagement as required by PSA 210.
60
Performing the preliminary engagement activities at the beginning of the current audit engagement
assists the auditor in identifying and evaluating events or circumstances that may adversely affect
the auditor’s ability to plan and perform the audit engagement.
A firm normally investigate a prospective client before accepting them. As prescribed in PSA 220, the
firm should come up with policies and procedures in accepting a client. This mechanism is focus on
understanding and managing risk to the firm with the aim of mitigating business risk. This is to
assure the firm that they will not be the next Arthur Andersen which is involved in Enron fiasco in
early 2000.
When a prospective client has previously been audited by a predecessor auditor, the successor
auditor should make certain inquiries of the predecessor auditor before accepting the engagement.
This is to know if the problematic or has an integrity issue. The successor auditor should seek
permission from the client to communicate the predecessor auditor due to confidentiality
requirement as prescribed in the Code of Professional Ethics of Accountants. The Code of Ethics does
not allow an auditor to disclose any confidential information without the client’s consent. The
successor auditor should make the following inquiries of the predecessor auditor:
The predecessor auditor’s understanding on the reason for the change of auditors.
Disagreements with management about accounting policies, auditing procedures, or other
similarly significant matters.
Any information that might bear on the integrity of management like fraud, noncompliance
with laws or regulation, or significant deficiencies and material weaknesses in internal
control.
When the client refuses to permit the predecessor auditor to respond, the successor auditor should
consider such situation a serious questions on management’s integrity. The successor auditor may
look for other information outside the predecessor auditor to assess whether to accept or reject the
prospective like. These information may be found from the client’s business associates like major
suppliers, customers, and key personnel in the entity. If the successor auditor finds it acceptable to
accept the prospective client as per firm’s policy, then the firm should evaluate compliance with the
Code of Professional Ethics for Accountants
As mentioned clearly in PSA 300, the firm should evaluate compliance with ethical requirements,
including independence. These two are vital to every audit engagement to protect the interest of the
public. Ethics refers to a system based on moral principles - knowing what is good or bad, that
indicate how we should behave. Professionalism is a the conduct or qualities that characterize a
professional person in the workplace. The Code of Ethics for Professional Accountants or “the Code”
sets out the fundamental principles of ethics, reflecting the professional’s recognition of its
responsibility to the public. A major part of the Code are actions that may impar auditors’
independence.
61
objectivity and professional skepticism. It is the appreciation of the auditor that indeed he or she is
independent. Independence in appearance is the avoidance of facts and circumstances that are so
significant that a reasonable and informed third party would be likely to conclude that an auditors’
integrity, objectivity or professional skepticism has been compromised. Here, it is the public’s
appreciation that the auditor is independent. Just to emphasize, for the firm to be independent, all
the audit team members should be independent of mind and in appearance.
You will discussed thoroughly this topic in your other subject. What we need to emphasize here is
that the firm should carefully evaluate compliance on these ethical requirements before accepting a
prospective client or continue an existing client to assess the auditability of the client.
When the firm decide to accept a prospective client or continue an existing client, the next step is to
set a terms of the engagement. This set forth the understanding with the clients on the engagement
which include the following:
The setting of the terms of engagement might be made orally or in writing. As a rule, to make any
contract enforceable before the court of law, it must be made in writing. In this case, the auditor
should prepare an engagement letter. This engagement letter establish whether the preconditions
for an audit are present and confirming that there is a common understanding between the auditor
and client of the terms of the audit engagement. Although, the PSA does not required an
engagement letter, it is encourage to have one for future legal issues.
The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the
audit, and that guides the development of the audit plan (PSA 300, par 7).
In establishing the overall audit strategy, the auditor shall (PSA 300, par 8):
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d. Consider the results of preliminary engagement activities and, where applicable, whether
knowledge gained on other engagements performed by the engagement partner for the
entity is relevant; and
e. Ascertain the nature, timing and extent of resources necessary to perform the engagement.
The process of establishing the overall audit strategy assists the auditor to determine, subject to the
completion of the auditor’s risk assessment procedures, such matters as:
The resources to deploy for specific audit areas, such as the use of appropriately experienced
team members for high risk areas or the involvement of experts on complex matters;
The amount of resources to allocate to specific audit areas, such as the number of team
members assigned to observe the inventory count at material locations, the extent of review
of other auditors’ work in the case of group audits, or the audit budget in hours to allocate
to high risk areas;
When these resources are to be deployed, such as whether at an interim audit stage or at key
cutoff dates; and
How such resources are managed, directed and supervised, such as when team briefing and
debriefing meetings are expected to be held, how engagement partner and manager
reviews are expected to take place (for example, on-site or off-site), and whether to
complete engagement quality control reviews.
The audit plant sets forth the nature, timing and extent of the audit procedures to be performed in
the audit engagement. This is referred as the “scope” of the audit procedures in the public practice.
Nature refers to what procedures are performed; timing is when the audit work is done, whether at
year-end or interim; and extend refers to how many samples are used or how much work is done.
The nature and extent of the planning activities depends on the nature of the client’s business and
the auditor’s previous experienced with the client. The auditor should be guided by the results of
the client’s acceptance decision, procedures performed to gain understanding the business of the
client and the industry they belong and other pre-planning and planning activities.
Once the overall audit strategy has been established, an audit plan (also known as audit program)
can be developed to address the various matters identified in the overall audit strategy, taking into
account the need to achieve the audit objectives through the efficient use of the auditor’s resources.
The establishment of the overall audit strategy and the detailed audit plan are not necessarily
discrete or sequential processes, but are closely inter-related since changes in one may result in
consequential changes to the other.
The auditor shall develop an audit plan that shall include a description of (PAS 300, par 9):
a. The nature, timing and extent of planned risk assessment procedures, as determined under
PSA 315.
b. The nature, timing and extent of planned further audit procedures at the assertion level, as
determined under PSA 330.
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c. Other planned audit procedures that are required to be carried out so that the engagement
complies with PSAs.
The audit plan is more detailed than the overall audit strategy in that it includes the nature, timing
and extent of audit procedures to be performed by engagement team members. Planning for these
audit procedures takes place over the course of the audit as the audit plan for the engagement
develops. For example, planning of the auditor’s risk assessment procedures occurs early in the audit
process. However, planning the nature, timing and extent of specific further audit procedures
depends on the outcome of those risk assessment procedures. In addition, the auditor may begin
the execution of further audit procedures for some classes of transactions, account balances and
disclosures before planning all remaining further audit procedures.
Every firm has its own audit plan and the standard does not prescribe a specific audit plan.
Regardless of the audit plan prepared by the firm, it consists of the following elements.
a. Specific Audit Objectives – this is an assertion-based objectives which is a result of the risk
assessment procedures (RAP) and other considerations in audit. For example, if during the
RAP, the auditor identifies risks on the valuation of the accounts receivable, then the auditor
should include this in their audit plan.
b. Audit Procedures – this is the specific procedures to address the specific audit objective.
c. Personnel Involved – this is the assign person who will do the procedure.
d. Period Involved – this is the period when the procedures is conducted.
As a result of unexpected events, changes in conditions, or the audit evidence obtained from the
results of audit procedures, the auditor may need to modify the overall audit strategy and audit
plan. PSA 300, par 10 provides that the auditor shall update and change the overall audit strategy
and the audit plan as necessary during the course of the audit. This may be the case when
information comes to the auditor’s attention that differs significantly from the information available
when the auditor planned the audit procedures. For example, audit evidence obtained through the
performance of substantive procedures may contradict the audit evidence obtained through tests of
controls.
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1. Obtain the year-end aged accounts receivable trial balance and
1.1 Foot the trial balance and agree total to accounts receivable
control account. __________ _________
1.2 Randomly select 40 accounts from the aged trial balance; agree
the information per the aged trial balance to the original sales
invoice and determine if the invoice was included in the
appropriate aging category. __________ _________
Documentation in Planning
The auditor shall include in the audit documentation (PAS 300, par 12):
The documentation of the overall audit strategy is a record of the key decisions considered
necessary to properly plan the audit and to communicate significant matters to the engagement
team. For example, the auditor may summarize the overall audit strategy in the form of a
memorandum that contains key decisions regarding the overall scope, timing and conduct of the
audit.
The documentation of the audit plan is a record of the planned nature, timing and extent of risk
assessment procedures and further audit procedures at the assertion level in response to the
assessed risks. It also serves as a record of the proper planning of the audit procedures that can be
reviewed and approved prior to their performance. The auditor may use standard audit programs or
audit completion checklists, tailored as needed to reflect the particular engagement circumstances.
A record of the significant changes to the overall audit strategy and the audit plan, and resulting
changes to the planned nature, timing and extent of audit procedures, explains why the significant
changes were made, and the overall strategy and audit plan finally adopted for the audit. It also
reflects the appropriate response to the significant changes occurring during the audit.
Audit Documentation
Audit documentation is the record of the audit procedures performed, the obtained audit evidence,
and the conclusion reach by the auditor on the reliability of the financial statements. These
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documentations may be in a form of a recorded paper, or on electronic or other media. The auditor
shall prepare audit documentation on a timely basis (PAS 230, par 7). Preparing sufficient and
appropriate audit documentation on a timely basis helps to enhance the quality of the audit and
facilitates the effective review and evaluation of the audit evidence obtained and conclusions
reached before the auditor’s report is finalized. Documentation prepared after the audit work has
been performed is likely to be less accurate than documentation prepared at the time such work is
performed.
The auditor shall prepare audit documentation that is sufficient to enable an experienced auditor,
having no previous connection with the audit, to understand (PAS 230, par 8):
a. The nature, timing, and extent of the audit procedures performed to comply with the PSAs
and applicable legal and regulatory requirements;
b. The results of the audit procedures performed, and the audit evidence obtained; and
c. Significant matters arising during the audit, the conclusions reached thereon, and significant
professional judgments made in reaching those conclusions.
The form, content and extent of audit documentation depend on factors such as:
Audit documentation may be recorded on paper or on electronic or other media. Examples of audit
documentation include:
Audit programs.
Analyses.
Issues memoranda.
Summaries of significant matters.
Letters of confirmation and representation.
Checklists.
Correspondence (including e-mail) concerning significant matters.
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The auditor may include abstracts or copies of the entity’s records (for example, significant and
specific contracts and agreements) as part of audit documentation. Audit documentation, however,
is not a substitute for the entity’s accounting records.
The auditor need not include in audit documentation superseded drafts of working papers and
financial statements, notes that reflect incomplete or preliminary thinking, previous copies of
documents corrected for typographical or other errors, and duplicates of documents.
Oral explanations by the auditor, on their own, do not represent adequate support for the work the
auditor performed or conclusions the auditor reached, but may be used to explain or clarify
information contained in the audit documentation.
The auditor maintain two files of working paper for each client, a current file and a permanent file. A
current file pertains solely to the current year’s audit, while permanent file are those documents
that can be used for future engagement.
Current files include the draft of client’s financial statements, the auditor’s report, working trial
balance, adjusting and reclassification entries, and working papers supporting the balances and
other representations in the financial statements. Permanent files include copies of article of
incorporation and by-laws, long-term contracts, patent agreements, pension plan, entity’s
administrative and accounting policies, and other relevant documents that has a continuing audit
significant. For an initial audit, auditors normally spend considerable time in gathering information
about the company. The documents containing such information is a permanent file.
The auditor shall assemble the audit documentation in an audit file and complete the administrative
process of assembling the final audit file on a timely basis after the date of the auditor’s report (PAS
230, par 14).
The firm requires to establish policies and procedures for the timely completion of the assembly of
audit files. An appropriate time limit within which to complete the assembly of the final audit file is
ordinarily not more than 60 days after the date of the auditor’s report.
The completion of the assembly of the final audit file after the date of the auditor’s report is an
administrative process that does not involve the performance of new audit procedures or the
drawing of new conclusions. Changes may, however, be made to the audit documentation during
the final assembly process if they are administrative in nature. Examples of such changes include:
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After the assembly of the final audit file has been completed, the auditor shall not delete or discard
audit documentation of any nature before the end of its retention period (PAS 230, par 15).
The firms requires to establish policies and procedures for the retention of engagement
documentation. The retention period for audit engagements ordinarily is no shorter than five years
from the date of the auditor’s report, or, if later, the date of the group auditor’s report.
¶ - footed
µ - agreed to GL and bank statement
/ - traced
Auditor’s Conclusion: Based on the cut-off test of cash, the adjusted balance of cash account appears
to be adequate. No adjusting entry necessary.
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This appendix provides examples of matters the auditor may consider in establishing the overall
audit strategy. Many of these matters will also influence the auditor’s detailed audit plan. The
examples provided cover a broad range of matters applicable to many engagements. While some of
the matters referred to below may be required by other PSAs, not all matters are relevant to every
audit engagement and the list is not necessarily complete.
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Whether there are any other expected communications with third parties, including any
statutory or contractual reporting responsibilities arising from the audit.
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Self-Help: You can also refer to the following sources to help you further
understand the lesson.
Philippine Standard on Auditing 230 (Redrafted) – Audit Documentation
https://aasc.org.ph/downloads/PSA/publications/PDFs/PSA-230-Redrafted.pdf
Louwers, T. J., Blay, A. D., Sinason, D. H., Strawser, J. R. & Thibodeau, J. C. (2018). Auditing and
Assurance Services. 17th Edition. New York: McGraw-Hill Education.
Whittington, R. O. and Pany K. (2020). Principles of Auditing & Other Assurance Services. 20 th
Edition. New York: McGraw-Hill Education.
Let’s Check
EXERCISE 6 (Adapted)
Each of the following quality control policies and procedures is typical of ones that can be found in
public accounting firms’ systems of quality control. Identify each of them with one of the six
elements of quality control identified by PSCQ 1.
Let’s Analyze
Multiple Choice Questions
1. The element of the audit planning process most likely to be agreed upon with the client before
implementation of the audit strategy is the determination of the
a. Methods of statistical sampling to be used in confirming accounts receivable.
b. Pending legal matters to be included in the inquiry of the client's attorney.
c. Evidence to be gathered to provide a sufficient basis for the auditor's opinion.
d. Schedules and analyses to be prepared by the client's staff.
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a. Observing the client's annual physical inventory taking and making test counts of selected
items.
b. Making arrangements with the client concerning the timing of audit field work and use of
the client's staff in completing certain phases of the examination.
c. Obtaining an understanding of the business.
d. Developing audit programs.
3. An auditor judged an item to be immaterial when planning an audit. However, the auditor may
still include the item if it is subsequently determined that:
a. Sufficient staff is available.
b. Adverse effects related to the item are likely to occur.
c. Related evidence is reliable.
d. Miscellaneous income is affected.
4. Which of the following concepts is most useful in assessing the scope of an auditor's program
relating to various accounts?
a. Attribute sampling.
b. Materiality.
c. The reliability of information.
d. Management fraud.
5. Which of the following is not a factor that affects the auditor's judgment, during audit planning,
as to the quantity, type, and content of working papers?
a. The auditor's preliminary assessment of control risk.
b. The auditor's preliminary evaluation of inherent risk based on discussions with the client.
c. The nature of the client’s business.
d. The type of report to be issued by the auditor.
6. How can the audit program best be described at the beginning of the audit process?
a. Tentative.
b. Conclusive.
c. Comprehensive.
d. Optional.
8. Which of the following matters would an auditor least likely consider when setting the direction
of the audit?
a. The selection of the engagement team and the assignment of audit work to the team
members.
b. The engagement budget which includes consideration of the appropriate amount of time to
allot for areas where there may be higher risks of material misstatement.
c. The availability of client personnel and data.
d. The manner in which the auditor emphasizes to engagement team member the need to
maintain a questioning mind and to exercise professional skepticism in the gathering and
evaluation of audit evidence.
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9. In planning an audit engagement, the audit is required to develop and document an
I. Overall audit strategy
II. Audit plan
a. I only
b. II only
c. Both I and II
d. Neither I and II
10. Which of the following activities should be performed by the auditor at the beginning of the
current audit engagement?
I. Perform procedures regarding the continuance of the client relationship and the specific
audit engagement.
II. Evaluate compliance with the requirements of the Code of Ethics for Professional
Accountants in the Philippines, including independence.
III. Establish an understanding of the terms of the engagement.
a. I and II only
b. II and III only
c. I and III only
d. I, II, and III
11. Which of the following factors or conditions is an auditor least likely to plan an audit to discover?
a. Financial pressures affecting employees
b. Inadequate monitoring of significant controls
c. High turnover of senior management
d. Inability to generate positive cash flows from operations
12. Which of the following tasks should be performed prior to the final audit?
a. Determining the fairness of property, plant, and equipment.
b. Confirming accounts receivable.
c. Testing internal control.
d. Collecting and evaluating evidence supporting the fairness of
inventory values.
14.Which of the following procedures should be performed by the auditor prior to starting an initial
audit?
I. Perform procedures regarding he acceptance of the client relationship and the specific
audit engagement.
II. Communicate with the previous auditor, where there has been a change of auditors, in
compliance with relevant ethical requirements.
a. I only.
b. II only.
c. Both I and II.
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d. Neither I nor II.
16. Which of the following procedures would an auditor least likely perform in planning a financial
statement audit?
a. Selecting a sample of vendors’ invoices for comparison to receiving reports.
b. Coordinating the assistance of entity personnel in data preparation.
c. Discussing matters that may affect the audit with firm personnel responsible for non-audit
services to the entity.
d. Reading the current year interim financial statements.
17. When approached to perform an audit for the first time, the CPA should make inquiries of the
predecessor auditor. This is a necessary procedure because the predecessor may be able to
provide the successor with information that will assist the successor in determining
a. Whether the predecessor’s work should be used.
b. Whether the company follows the policy of rotating its auditors.
c. Whether in the predecessor’s opinion internal control of the company has been satisfactory.
d. Whether the engagement should be accepted.
18. What is the responsibility of a successor auditor with respect to communicating with the
predecessor auditor in connection with a prospective new audit client?
a. The successor auditor has no responsibility to contact the predecessor auditor.
b. The successor auditor should obtain permission from the prospective client to contact the
predecessor auditor.
c. The successor auditor should contact the predecessor auditor regardless of whether the
prospective client authorizes contact.
d. The successor auditor need not contact the predecessor if the successor is aware of all
available relevant facts.
19. In planning an audit, the auditor’s knowledge about the design of relevant controls should be
used to
a. Identify the types of potential misstatements that could occur.
b. Assess the operational efficiency of internal control.
c. Determine whether controls have been circumvented by collusion.
d. Document the assessed level of control risk.
20. Marlon, CPA, discussed selected elements of the overall audit plan and certain audit procedures
with the audit committee, management, and staff of Jabla Traders, his audit client. This move by
the auditor has the following benefits, except
a. The overall audit plan and the audit program becomes a shared responsibility between the
auditor and the client’s management.
b. The audit can be performed with improved effectiveness and efficiency.
c. Coordination of audit procedures with work of the entity’s personnel can be initiated.
d. Improved business relationship between the client and the auditor is established.
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21. An entity’s accounting records generally include the records of initial entries and supporting
records including
a. Confirmations from third parties.
b. Information obtained by the auditor from such audit procedures as inquiry, observation, and
inspection.
c. Worksheets and spreadsheets supporting cost allocations.
d. Other information developed by, or available to, the auditor to permit him/her to reach
conclusions through valid reasoning.
22. Which of the following factors would least likely affect the form, content, and extent of an
auditor’s working papers?
a. The content of the representation letter.
b. The identified risks of material misstatement.
c. The audit methodology and tools used.
d. The significance of the audit evidence obtained.
24. The following statements relate to the form and content of working papers. Which is false?
a. The auditor should prepare working papers which are sufficient complete and detailed to
provide an overall understanding of the audit.
b. The auditor should include in the working papers information on planning the audit work;
the nature, timing, and extent of the audit procedures performed and the results of such
procedures; and the conclusions drawn from the audit evidence obtained.
c. Working papers should include documentation of every matter the auditor considers during
the audit.
d. Working papers should include the auditor’s reasoning on all significant matters which
require the exercise of judgment, together with his/her conclusion thereon.
25.An audit supervisor reviewed the work performed by the staff to determine if the audit was
adequately performed. The supervisor accomplished this by primarily reviewing which of the
following?
a. Checklist
b. Working Papers
c. Analytical procedures
d. Financial statements
27.Which of the following is usually included or shown in the auditor’s working papers?
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a. The procedures used by the auditor to verify the personal financial status of members of
client’s management team.
b. Analyses that are designed to be a part of, or a substitute for, the client’s accounting records.
c. Experts from authoritative pronouncements that support the underlying accounting policies
used in preparing the financial statements.
d. The manner in which exceptions and unusual matters disclosed by the auditor’s procedures
were resolved or treated.
28.The following statements relate to audit working papers. Which statement is incorrect?
a. The auditor is prohibited from utilizing schedules, analyses and other documentation
prepared by the entity.
b. The nature and complexity of the business of the audit client may affect the form and content
of working papers.
c. The term “documentation” in PSA 230 means the material (working papers) prepared by and
for, or obtained and retained by the auditor in connection with the performance of the audit.
d. The extent of working papers is a matter of professional judgment since it is neither necessary
nor practical to document every matter the auditor considers.
29.Audit documentation should possess certain characteristics. Which of the following is one of the
characteristics?
Audit documentation should be indexed Audit documentation should be organized
and cross-reference to benefit the client’s staff
A. Yes Yes
B. No Yes
C. Yes No
D. No Yes
30.Which of the following is the least persuasive documentation in support of an auditor’s opinion?
a. Notation of interferences drawn from ratios and trends.
b. Notation of appraisers’ conclusions documented in the auditor’s working papers.
c. Lists of negative confirmation requests for which no response was received by the auditor.
d. Schedules of details of physical inventory counts conducted by the client.
In a Nutshell
ACTIVITY 7
After learning the audit documentations, reading the articles found in the Self-Help, and using other
resources, evaluate the issues underlying these arguments below: (50 words)
“Working papers should contain facts and nothing but facts,” said student A. “Not at all” replied
student B. “The audit working papers may also include expression of opinion. Facts are not always
available to settle all issues.” “In my opinion,” said student C, “a mixture of facts and opinions in the
audit working papers would be most confusing if the papers were produced as a means of
supporting the auditors’ opinion when their report has been challenged.” (Adapted)
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
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ACTIVITY 8 (Adapted)
After learning the pre-planning activities, reading the articles found in the Self-Help, and using other
resources, evaluate the issues underlying these arguments below: (50 words)
The president of Allpurpose Loan Company had a genuine dislike for external auditors. Almost any
conflict generated a towering rage. Consequently, the company changed auditors often.
The firm of Wells & Ratley (W&R), CPAs, was recently hired to audit the 2017 financial statements.
W&R succeeded the firm of Canby & Company (C&C), which had obtained the audit after Albrecht &
Hubbard (A&H) had been fired. A&H audited the 2016 financial statements and rendered a report
that contained an additional paragraph explaining an uncertainty about Allpurpose Loan Company’s
loan loss reserve. Goodbye A&H! The president then hired C&C to audit the 2017 financial
statements, and Chris Canby started the work, but before the audit could be completed, Canby was
fired and W&R was hired to complete the audit. C&C did not issue an audit report because the audit
was not finished.
Does the Wells & Ratley firm need to initiate communications with Canby & Company? With
Albrecht & Hubbard? With both? Explain your response in terms of the purposes of communications
between predecessor and successor auditors.
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
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Q&A LIST
Questions/Issues Answers
1. 1.
2. 2.
3. 3.
4. 4.
5. 5.
KEYWORDS INDEX
This section lists down the keywords that help you for recall the discussions.
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Continuance
Code of Ethics Nature, Timing and Extent of Setting the Terms of
Audit Procedures Engagement
Completion of Audit Overall Audit Strategy Specific Audit Procedures
Compliance with Ethical Overview of Audit Process Successor Auditor
Requirements
Current File Permanent File Working Papers
Course Schedule
This section calendars all the activities and exercises, including readings and lectures, as well as time
for making assignments and doing other requirements.
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7. By enrolling in OBD course, students agree and abide by all the provisions of the Online Code of
Conduct, as well as all the requirements and protocols in handling online courses.
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