CH01: NATURE OF SPECIALIZED INDUSTRIES
➢ Distinct market with a unique way of accounting for
transactions and reporting financial results.
➢ Has specific financial reporting standards
applicable to it or has distinct accounting policies
developed to account for specialized transactions
and balances based on the normally applied
financial reporting standards.
[ EXAMPLES OF SPECIALIZED INDUSTRIES ]
❖ Banking
 Financial institutions whose principal activity is
taking deposits and borrowing for lending and
investing.
 Regulated by the Bangko Sentral ng Pilipinas
(BSP).
 Relevant standards: PFRS 7 – Financial
Instruments: Disclosure, PFRS 9 – Financial
Instruments, and Philippine Auditing Practice
Statements (PAPS) 1006 – Audits of the Financial
Statements of Banks.
❖ Construction
 Encompasses many facets of property, including
development, appraisal, marketing, selling, leasing,
and management of commercial, industrial,
residential, and agricultural properties.
 Relevant standards: PAS 16 – Property, Plant, and
Equipment (PPE), PFRS 15 – Revenue from
Contracts with Customers, and PAS 11 –
Construction Contracts.
❖ Mining
 Extraction of precious minerals and other
geological materials.
 Extracted materials are transformed into a
mineralized form that serves an economic benefit.
 Typical activities: metals production, metals
investing, and metals trading.
 Relevant standards: PAS 16 – Property, Plant, and
Equipment (PPE), PFRS 16 – Leases, and PFRS 6 –
Exploration for and Evaluation of Mineral
Resources.
❖ Education
 Institutions such as ministries of education, local
educational authorities, teacher training institutions,
schools, universities, etc.
 Relevant accounting standards: IFRS 9 – Financial
Instruments and IFRS 15 - Revenue from Contracts
with Customers.
❖ Insurance
 Made up of companies that offer risk management
in the form of insurance contracts.
 Basic concept: the insurer, will guarantee payment
for an uncertain future event, while the insured or
the policyholder, pays a smaller premium to the
insurer in exchange for that protection.
 Most relevant accounting standard: IFRS 17 –
Insurance Contracts.
❖ Not-For-Profit Entities
 All of the money earned by or donated to a not-for-
profit entity is used to pursue the organization's
objectives and keep it running.
 Typically tax-exempt charities or other types of
public service organizations.
 Income is not distributed to the group's members,
directors, or officers.
~ AUDIT CONSIDERATIONS ~
❖ Competence
 Competence of the audit firm to provide the service,
including time and resources, to do so.
 Audit firm personnel has knowledge of relevant
industries and has experience with relevant
regulatory or reporting requirements.
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❖ Audit Planning
 Identification of the risk of material misstatement in
a specialized.
 By obtaining an appropriate understanding of the
business and its environment.
❖ Reliance on Experts
 Auditor may use an auditor’s expert to obtain audit
evidence.
 Quite likely in a specialized industry because
despite being competent, the audit firm may not
have the necessary specific expertise in some areas.
 The auditor must adhere to the requirements and
principles of the Philippine Standard on Auditing
(PSA) 620, Using the Work of an Auditor’s Expert.
❖ Laws & Regulations
 PSA 250, Consideration of Laws and Regulations in
an Audit of Financial Statements
 Direct: gather sufficient and appropriate audit
evidence that the entity has complied with such laws
and regulations.
 Indirect: undertake procedures to identify non-
compliance with such laws and regulations.
 Pre-audit – determination of client acceptance and
provision of engagement letter.
 Audit planning – determination of team
composition and schedule, discussion with partner
of key areas of concern. Use performance
materiality for scoping in of accounts.
 Understanding internal control – request for
process flows and walk it through.
 Substantive tests – consumes majority of the time
of the auditors.
 Reporting – issuance of audit report, there is a
template.
[ SCOPING IN OF ACCOUNTS ]
✓ Using the performance materiality, determine which
accounts are scoped in.
✓ Performance materiality is a percentage (50% -
100%) of the overall materiality.
✓ Using the clearly insignificant materiality level,
determine which accounts are scoped out.
✓ Clearly insignificant is a percentage (normally 5%)
of the overall materiality.
✓ There are accounts that are relevant to the audit and
are automatically scoped in regardless of the
amount, e.g. cash, taxes, penalties, interests, etc.
✓ After scoping in and scoping out, those remaining
P/L accounts should be consolidated and checked if
it will meet the performance materiality level, if it
reaches that level, then it would be considered as an
individual account.
~ AUDIT PROGRAM ~
❖ Usually prepared by the Audit Manager.
❖ From the trial balance from which we have determined the
accounts to be tested, the manager then indicates the tests
to be performed to each account and assigns the staff to do
the testing.
❖ Also, the manager includes other audit procedures that are
not specific to an account such as test of journal entries,
walk-through of controls, test of beginning balances, etc.
 [ UNDERSTANDING OF INTERNAL CONTROLS ]

❖ The amounts in the trial balances are the result of the

accounting process.
❖ Depending on the size and structure of the organization,
the accounting process may be done by several teams. For
instance, a common segregation would be:
✓ Sales – creates and journalizes sales invoices.
✓ Receivables – creates official receipts and creates
the journal entry for the collection.
✓ Accounts payable – creates the journal entry to post
the expense and set up the accounts payable.
✓ Disbursements – creates the journal entry for the
payment of accounts payables and other
disbursements.
✓ Financial reporting – creates other entries that are
not included in the other processes such as
depreciation, taxes, interest expenses on loans,
amortization of prepayments, accruals, etc.
❖ These processes have a documented process flow chart
which were approved by those charged with governance.
❖ Obtain a copy of such process flows and perform a walk-
through of the organizations processes that are affecting
the financial statements.
❖ In the walk-through of these processes, identify the
internal controls in place to ensure that there are no errors
in the recording of the transactions, e.g. reviews,
countersignatures, system checking, blind counts, etc.
❖ If the partner determines that the audit team can rely on
the internal controls, then, test of controls will be
performed. In the testing of controls, you are basically
checking if the internal controls identified in the walk-
through are actually being done, e.g. select random
samples of vouchers to check if they are signed by the
accounting manager. If the internal controls are not
reliable or if there are no internal controls, then the audit
team will proceed to do extensive substantive testing.

AUDIT SAMPLING
• Sampling is done to facilitate efficiency in doing the
audit.
• This is applied in most of the tests performed by the
auditors including test of controls and substantive
testing.
• Depending on the population in the account being
tested sampling other than random might be applied.
• Number of samples is dependent on the amount of
the account, result of the test of controls and number
of population.
• There is a tool being used to calculate for the
number of samples.
• There are also cases wherein the population is being
tested 100%.

SUBSTANTIVE TESTING
• Means looking at the supporting documents for the
balance or transaction being tested.
• For balance sheet accounts, test of balance is
normally done, e.g. external confirmation of
accounts receivable balances.
• For p/l accounts, test of details of transactions is
normally done, e.g. vouching of expenses.

SUFFICIENT APPROPRIATE EVIDENCE

• Sufficiency refers to the quantity.
• Appropriateness refers to the quality.
✓ Relevance to the transaction or balance being
tested, e.g. for expense, official receipt or
sales invoice from the vendor is the most
relevant, bank debit can also be an alternative
but not too relevant to the transaction.
✓ Reliability of the supporting document,
documents coming from third-party are more
reliable than internal documents.

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