PSA 315 PSA 520
page 53-55 - conditions & events objectives, analytical procedure (page 2)
IDENTIFYING AND ASSESSING RISK OF MATERIAL
MISSTATEMENT
Understanding the Entity and Its Environment
The standard required that an auditor should obtain an
understanding of the entity and its environment,
including its internal control, sufficient to identify and
assess the risks of material misstatement. The standard
provinces guidance on the following:
● Risk assessment procedures and sources of
information about the entity and its environment
including its internal control
● Assessing the risk of material misstatement
● Communicating with governance and
management
● Documentation
Risk Assessment Procedures and Sources of
Information
The auditor should perform the following risk
assessment procedures to obtain an understanding of
the entity and its environment, including its internal
controls.
● Inquiries of management and others within the
entity
● Analytical procedures
● Observation and inspection
The auditor is not required to apply all the risk
assessment procedures for each aspect of the
understanding required.
The auditor may obtain information by making inquiries
of the entity’s legal direction or of valuation experts that
the entity has used.
Reviewing information obtained from external sources
such as reports by analysts, banks, or rating agencies,
trade and economic journals or regulatory or financial
publications may also be useful in obtaining information
about the entity.
Inquiries
The auditor obtains information from management and
those responsible for financial reporting. However,
useful information can be obtained from others within
the entity like production staff, internal audit personnel
and other employees.
● Inquiries with governance may help the auditor
understand the environment in which the
financial statements are prepared.
● Inquiries directed towards internal auditors may
relate to their activities concerning the
monitoring of the entity’s internal control.
● Inquiries of employees involved in initiation,
processing or recording complex or unusual
transactions.
● Inquires directed towards in-house legal counsel
● Inquiries directed towards marketing or sales
personnel.
Analytical Procedures
These include ratio analysis, trend analysis, and
common size analysis of financial statements as well as
non-financial information.
● These procedures enable auditor to identity
situation where significant fluctuations exist
● Observation and Inspection
● Observation of entity activities and operations
● Inspection of documents
● Reading reports
● Visits to the entity’s plant facilities
Discussion among the Audit Team
● The members of the engagement team should
discuss the weakness of the entity’s financial
statements to materials misstatements.
● Such discussion would sharing of knowledge
and exchange of information
Understanding the entity and its environment
● Industry, regulatory, and other external factor,
including the applicable financial reporting
framework
● Nature of the entity, including the entity’s
selection and application of accounting policies
● Objectives and strategies and the related
business risks.
● Measurement and review of the entity’s financial
performance
● Internal control
Examples of matters Industry conditions
● The market and competition, including demand,
capacity, and price competition.
● Cyclical or seasonal activity
● Product technology relating to the entity’s
products
● Energy supply and cost
Regulatory environment
● Accounting principles and industry specific
practices
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 ● Regulatory framework, for a regulated industry ● Foreign currency assets, liabilities and
(like; baking sector) transactions
● regulation that significantly affect the entity’s ● Industry-specific significant categories
operations ● Financial statement presentation

Other external factors currently affecting the entity’s

business COMPLETION STAGE OF AUDIT
● General level of economic activity (for example,
recession, growth) Timeline for Major Activities in Audit
● Interest rates and availability of financing
● Inflation currency revaluation.

Nature of the Entity

● The entity’s operations, its ownership and
governance, the types of investments that it is
making and plans to make, the way that the
entity is structured and how it is financed.
● It enables the auditor to understand the classes
of transactions, account balances, and
disclosures to be expected in the financial
Procedures Prior to the Audit Report Release Date
statements.
● Completing substantive procedures
● Attorney’s letters
Examples of matters Business Operations Nature of
● Written representations
Business
● Going-concern assessment
● Products or services and markets
● Adjusting entries
● Conduct of operations
● Audit documentation review
● Joint ventures and outsourcing activities
● Subsequent events
● Key customers.
● Subsequently discovered facts
● Employment
● Research and development
Completing Substantive Procedures
● Transactions
Roll-forward procedures: Extend work from interim
period to date of the financial statements
Investments
● Include both tests of controls and substantive
● Acquisitions, mergers
procedures
● Investments and dispositions of securities and
● Performed following date of the financial
loans.
statements
● Capital investment activities
● Idea is to obtain evidence through the date of
the financial statements
Financing
● Group structure
Analytical procedures: Study of relationships among
● Debt structure
financial and nonfinancial data
● Leasing of property, plant or equipment
● Can be used in planning (required), substantive
● Beneficial owners
testing, and near the end of the audit (required)
● Related parties
● Near the end of the audit, analytical procedures
● Use of derivative financial instruments.
identify unusual or unexpected relationships not
previously identified
Financial Reporting
● Accounting principles and industry specific
Review accounts for “miscellaneous”, “other,” and
practices.
“clearing” accounts (may relate to earnings
● Revenue recognition practices.
management)
● Accounting for fair values.
● Inventories

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Accounting estimates: ● Description of each item or case included in the
Examples include future cash flows in evaluating asset listing
impairments, allowance for doubtful accounts for ● Evaluation of the likelihood of an unfavorable
receivables, and depreciation lives for fixed assets outcome – PAS 37
● Review management’s process for developing ● Estimate of the range of potential loss
estimates ● Understanding regarding unasserted claims
● Review estimates for reasonableness
Written Representations
Attorney’s Letters Written Representations or Management
Procedures for Litigation, Claims, and Assessments Representation Letter
● Inquiry of clients ● Provided by management to auditors
● Review minutes of meetings of stockholders, ● Dated using date of auditors’ reports (audit
directors, and committees completion date)
● Review contracts, loan agreements, and ● Broad purpose
correspondence from taxing and governmental ○ Impress upon management its primary
agencies responsibility for the financial
● Obtain information concerning guarantees from statements
bank confirmations ○ May establish auditors’ defense if a
● Review documentation related to legal services question related to inquiries
● Attorney’s Letter subsequently arises
● Qualify or disclaim an opinion if not provided by
Attorney’s Letters the client

Contents of Written Representations

● Information related to financial statements
○ Management’s responsibility for F/S and
internal control over financial reporting
○ Appropriate disclosure, presentation,
and reasonableness of items
○ Statement that uncorrected
misstatements are immaterial
● Information provided to auditors by
management
● Internal control over financial reporting (for
Attorney’s Letters: Responsibilities public entities)
Auditors
● Initiate request for attorney letter Going-Concern Assessment
● Send letter to attorney including information ● Auditors required to consider whether evidence
related to litigation, claims, and assessments obtained during audit raises questions about
ability to continue as a going concern
Client ● If concerns exist, evaluate management’s plans
● Prepare listing, description, and evaluation of to mitigate
litigation, claims, and assessments for letter ○ If concerns do not remain: No effect on
report or financial statements
Attorney ○ If concerns remain: Disclose in F/S and
● Respond to auditors directly regarding client’s modify auditors’ report
description of litigation, claims, and
assessments contained in attorney letter Adjusting Entries
● Accumulate dollar effects of identified
Attorney’s Letters: Contents misstatements
● Listing of pending litigation, claims, and ● Evaluate materiality
assessments

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 ○ Rollover method considers the current
period income effect(s) of
misstatements
○ Iron curtain method considers the
aggregate effect of the adjustments on
the entity’s balance sheet
○ Philippine Standards on Auditing
requires adjustments to be proposed if
material under either approach
● Recommend adjustment of all misstatements
identified
● Carry any uncorrected misstatements forward
for consideration in future audits
● Communicate all adjustments and
misstatements to audit committee or individuals
charged with governance
Audit Documentation Review
Audit supervisor
● Have all steps in the audit plan been performed?
● Is referencing among documentation clear?
● Are explanations understandable?
Audit manager and partner
● Is the overall scope of the audit adequate?
● Do overall conclusions support the opinion?
Reviewing partner
● Is the quality of audit work and reporting
consistent with quality standards of the firm?
Subsequent events occur between the date of the
financial statements and date of the auditors’ report
Procedures to Identify Subsequent Events
● Obtain understanding of procedures
management performs to identify subsequent
events
● Inquire of management and those charged with
governance
● Read minutes of meetings of owners,
management, and those charged with
governance
● Review entity’s interim financial statements
Types of Subsequent Events
● Provide new information about conditions
existing at date of the financial statements
○ Adjust financial statements to reflect
new information
● Involve events that arose following the date of
the financial statements
○ Disclose in financial statements
Subsequently discovered facts become known after the
date of the auditors’ report
● If discovered prior to audit report release date,
perform procedures related to items
○ Revise date of auditors’ reports to
reflect new completion date
○ Dual date auditors’ reports
● Following audit report release date: If facts
would result in revision of auditors’ report or F/S
and individuals are relying on F/S
○ Notify individuals relying on F/S
○ Issue revised F/S which provide
disclosure of facts
Procedures Following Audit Report Release Date
● Subsequently discovered facts
● Omitted procedures
● Communication with those charged with
governance
● Management letters
Omitted Procedures
● Perform procedures if:
○ Omitted procedures are important
○ Individuals are currently relying on
financial statements and auditors’
reports
● If previous opinion can be supported, no further
action necessary
● If previous opinion cannot be supported
○ Withdraw the original report
○ Issue revised reports
○ Inform persons currently relying on the
financial statements
Communication with Individuals Charged with
Governance
● Auditors’ responsibility under GAAS
● Overview of planned scope and timing of audit
● Judgment about quality of accounting policies,
estimates, and disclosures
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 ● Significant difficulties encountered during audit
REPORTS ON AUDITED FINANCIAL STATEMENTS
● Uncorrected misstatements
● Disagreements with management
● Material, uncorrected misstatements Major Topics
● Representations requested from management ● Overview of Reporting
● Management consultations with other auditors ● The Standard (Unmodified) Report
● Significant issues discussed with management ● Reasons for Departing from Standard
● Other findings or issues significant and relevant (Unmodified) Report
to those charged with governance ● Departures from GAAP
● Scope limitations
Management Letters ● Audit of group financial statements
● Not required under GAAS ● Other Matters Encountered During the Audit
● Are prepared as a by-product of procedures ● Other Issues and Reporting
performed in audit
● Provide recommendations to client for Overview of Reporting
improving effectiveness and efficiency of Reports Accompanying Financial Statements
operations
● Delivered by auditors to client following audit
engagement

Summary of Audit Communications

Components of the Standard (Unmodified) Report

Introductory paragraph
F/S and years examined

Opinion
Are F/S presented in accordance with the applicable
financial reporting framework (GAAP)?

Basis for Opinion

Management’s Responsibility section

● Management responsible for financial
statements
● Management responsible for internal control
* If oral communication, document in audit
documentation. Auditor’s Responsibility section
● Auditor responsible for issuing opinion on
financial statements
● Audit conducted in accordance with GAAS
● Audit provides reasonable assurance

The Standard (Unmodified) Report: Other Elements

1. Title includes the word “independent”
2. Addressed to the client (normally, shareholders

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 and board)
3. Dated when auditors have obtained sufficient
appropriate evidence (date of the auditors’
report)
4. Signed by the accounting firm
Types of Opinion
1. Unmodified opinion
● F/S are in accordance with GAAP
● Standard report may be modified to
disclose additional matters
Adverse Opinion
Issued when F/S do not present fairly according to GAAP
(i.e., a serious, pervasive departure from GAAP).
Report Modifications:
● Add paragraph preceding the opinion paragraph
explaining the departure and detailing P
amounts involved
● Change opinion paragraph (“financial
statements do not present fairly”)
Scope Limitations

2. Qualified opinion
● “Except for” some matter, F/S are in
accordance with GAAP

3. Adverse opinion
● F/S are not in accordance with GAAP

4. Disclaimer of opinion
● No opinion is issued by auditors

Reasons for Departing from Standard (Uncodified)

Report
Departures from GAAP

Circumstance-Imposed
● Situation in which matters beyond auditors’ and
client’s control limit procedures performed by
auditors
● Example: inability to observe year-end inventory
because of late appointment

Client-Imposed
● Situation in which client specifically limits
Qualified Opinion
auditors’ procedures
Issued when departure is material, yet not pervasive
● Should be viewed as a significant restriction and
Report Modifications:
a disclaimer is ordinarily issued
● Add paragraph preceding the opinion paragraph
explaining departure and detailing P amounts
Scope Limitations: Qualified Opinion
involved
Issued when scope limitations are material, but not
● Modify opinion paragraph (“In our opinion,
pervasive
except for the matter discussed in the preceding
Report Modifications:
paragraph,….”)
● Add paragraph preceding the opinion paragraph
describing the scope limitation
● Modify opinion paragraph (“In our opinion,

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 except for”)
Scope Limitations: Disclaimer of Opinion
Pervasive scope limitation, usually client-imposed
● Significance of the limitation is such that
auditors cannot gather sufficient appropriate
evidence to form an opinion
Report Modifications:
● Introductory paragraph: (“We were engaged to
audit ….”)
● Modify Auditor’s Responsibility section:
○ Note that auditors were not able to
obtain sufficient appropriate evidence
○ Delete paragraphs describing an audit
and indicating that the audit provides a
basis for the opinion
● Add paragraph preceding the opinion paragraph
describing the scope limitation
● Modify opinion paragraph (“…we do not express
an opinion….”
Audit of Group Financial Statements
Group financial statements
Financial statements comprised of more than one
division/subsidiary/segment/component
Group auditors
Conduct audit of material portion of the entity
Component auditors
May be engaged by group auditors to audit divisions,
subsidiaries, or components
Audit of Group FS: Effect on Report
Group auditors should
● Verify component auditors’ reputation and
independence
● Communicate and coordinate with component
auditors
Options
● Take responsibility for work: Standard
(unmodified) report
● Name component auditors
○ Present report of component auditors,
only with their permission
● Refer to component auditors
○ Modify Auditor’s Responsibility section
○ Modify opinion paragraph
○ Still express unmodified opinion, if
appropriate
Summary:
Other Matters Encountered During the Audit
General Approach for Other Matters
Issue unmodified opinion but add paragraph to report to
discuss the matter
● Emphasis-of-matter paragraphs provide
information related to users’ understanding of
F/S
● Other-matter paragraphs provide information
related to users’ understanding of audit,
auditors’ responsibility, or auditors’ report
Situations
● Consistency
● Going-concern
● Other Information
● Required Supplementary Information
● Emphasis of a matter
Consistency
Relates to:
● Change in accounting principles
● Adjustments to correct misstatements in
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 previously issued F/S
Type of changes in accounting principles:
● Accounting principles (GAAP to GAAP)
● Form of reporting entity
● Accounting principles (non-GAAP to GAAP)
● Accounting principle inseparable from changes in
estimates
Consistency: Effect on Report
● Add emphasis-of-matter paragraph following the
opinion paragraph
● May issue a qualified opinion (GAAP departure)
if:
○ Change is not justified
○ Change is not accounted for in
accordance with GAAP
Going Concern Uncertainties
Auditors are responsible to evaluate whether substantial
doubt exists about ability of entity to continue in
existence for one year beyond date of F/S
Options
● Add emphasis-of-matter paragraph following
opinion paragraph (still unmodified opinion)
● If serious uncertainty, may issue disclaimer of
opinion
● Modified language must include the words
substantial doubt and going concern
Non-FS Information
Other Information Accompanying F/S
● Auditors required to ensure information
consistent with F/S
● If not consistent, either revise opinion on F/S or
add emphasis-of-matter paragraph
Required Supplementary Information
● Auditors required to perform limited procedures
and expand report on F/S to address
● Add other-matter paragraph to identify
information, describe procedures performed,
and identify any issues
Emphasis of Matter
● Call user attention to important matters
● Add emphasis-of-matter paragraph after opinion
paragraph discussing the matter
Other Issues and Reporting
Comparative FS
Continuing auditors
● Report should address all years presented in
comparative form
● Update opinion by considering if previously
issued opinions still appropriate
● If previously issued opinions not appropriate,
revise opinion in current report (other-matter
paragraph)
Predecessor auditors
● With permission, auditors may present reissued
report from predecessor on prior-years’ F/S
along with successor’s report on current F/S
● If predecessors’ report not presented, successor
auditors’ report must reference predecessors’
report and opinion on prior-years’ F/S
(other-matter paragraph)
Summary of FS
● Derived from the full set of financial statements
● Auditor can only examine and report if audited
full financial statements
● Report
○ Refers to auditors’ report on full
financial statements
○ Indicates whether information in
summary financial statements is
consistent in relation to the full financial
statements
Association with Unaudited FS
● Auditors permit use of name in communication
including F/S
● Issue disclaimer of opinion (one paragraph)
○ Do not mention auditing procedures
performed
○ Must identify any known departures
from GAAP in the report
○ Should cover all unaudited prior-years’
financial statements
Lack of Independence
● Scenario: Auditors begin engagement but
independence subsequently compromised
● Report
○ Single paragraph
○ Indicates auditors are not independent
○ Does not indicate why independence
lacking
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Reporting Summary
May issue disclaimer if:
● Lack of independence
● Associated with financial statements
● Material and pervasive going-concern
uncertainty
Report Examples
Example 1:
We have audited the accompanying financial
statements of Dunder-Mifflin, Inc., which comprise the
balance sheet as of December 31, 2022, and the related
statements of income, changes in shareholders’ equity,
and cash flows for the year then ended, and the related
notes to the financial statements.
Management’s Responsibility for the Financial
Statements
Management is responsible for the preparation and fair
presentation of these financial statements in
accordance with accounting principles generally
accepted in the United States of America; this includes
the design, implementation, and maintenance of
internal control relevant to the preparation and fair
presentation of financial statements that are free from
material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these
financial statements based on our audit. We conducted
our audit in accordance with auditing standards
generally accepted in the United States of America.
Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the
financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit
evidence about the amounts and disclosures in the
financial statements. The procedures selected depend
on the auditor’s judgment, including the assessment of
the risks of material misstatement of the financial
statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal
control relevant to the entity’s preparation and fair
presentation of the financial statements 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 entity’s internal
control. Accordingly, we express no such opinion. An
audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of
significant accounting estimates made by management,
as well as evaluating the overall presentation of the
financial statements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our
audit opinion
Opinion Paragraph
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of Dunder-Mifflin, Inc. as of December 31, 2022,
and the results of its operations and its cash flows for
the year then ended in accordance with accounting
principles generally accepted in the United States of
America.
Basis for Qualified Opinion
As discussed in Note 16, an additional provision In the
amount of P30,000,000 for possible uncollectible
receivables at December 31, 2021, was charged to
operations during the year ended December 31, 2022,
which, in our opinion, should have been reflected In the
financial statements for 2021. Had this provision been
properly recorded in the 2021 financial statements,
Dunder-Mifflin, Inc. would have reported net earnings of
P700,000 for the year ended December 31, 2022, rather
than the net loss of P29,300,000 as reflected in the
statements of income, changes in shareholders’ equity,
and cash flows for that period.
Adverse Opinion
In our opinion, because of the significance of the matter
discussed In the Basis for Adverse Opinion paragraph,
the financial statements referred to above do not
present fairly the financial position of Dunder-Mifflin, Inc.
as of December 31, 2022, or the results of its operations
or its cash flows for the year then ended in accordance
with accounting principles generally accepted in the
United States of America.
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Basis for Adverse Opinion
As discussed in Note 16, an additional provision In the
amount of P30,000,000 for possible uncollectible
receivables at December 31, 2021, was charged to
operations during the year ended December 31, 2022,
which, in our opinion, should have been reflected In the
financial statements for 2021. Had this provision been
properly recorded in the 2021 financial statements,
Dunder-Mifflin, Inc. would have reported net earnings of
P700,000 for the year ended December 31, 2022, rather
than the net loss of P29,300,000 as reflected in the
statements of income, changes in shareholders’ equity,
and cash flows for that period.
Qualified Opinion
In our opinion, except for the possible effects of the
matter described in the Basis for Qualified Opinion
paragraph, the financial statements referred to above
present fairly, in all material respects, the financial
position of Dunder-Mifflin, Inc. as of December 31, 2022,
and the results of its operations and its cash flows for
the year then ended in accordance with accounting
principles generally accepted in the United States of
America.
Basis for Qualified Opinion
Dunder-Mifflin, Inc. did not make a count of their physical
inventory in 2022, stated in the accompanying financial
statements at P10,000,000 at December 31, 2022, and
we were unable to observe the physical quantities on
hand. Dunder-Mifflin, Inc.'s records do not permit the
application of other auditing procedures to the audit of
inventories.
We were engaged to audit the accompanying financial
statements of Dunder-Mifflin, Inc., which comprise the
balance sheet as of December 31, 2022, and the related
statements of income, stockholders' equity, and cash
flows for the year then ended, and the related notes to
the financial statements.
Disclaimer of Opinion
Because of the significance of the matter described in
the Basis for Disclaimer of Opinion paragraph, we have
not been able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion.
Accordingly, we do not express an opinion on these
financial statements.
Basis for Disclaimer of Opinion
Dunder-Mifflin, Inc. did not make a count of their physical
inventory in 2022 , stated in the accompanying financial
statements at P10,000,000 at December 31, 2022, and
we were unable to observe the physical quantities on
hand. Dunder-Mifflin, Inc.'s records do not permit the
application of other auditing procedures to the audit of
inventories.
Auditor's Responsibility
Our responsibility is to express an opinion on these
financial statements based on conducting the audit in
accordance with auditing standards generally accepted
In the United States of America. Because of the matter
described in the Basis for Disclaimer of Opinion
paragraph, however, we were not able to obtain
sufficient appropriate audit evidence to provide a basis
for an audit opinion.
Opinion
In our opinion, based on our audit and the report of
other auditors, the financial statements referred to
above present fairly, in all material respects, the financial
position of Dunder-Mifflin, Inc. as of December 31, 2022
and the results of its operations and its cash flows for
the year then ended in accordance with accounting
principles generally accepted in the United States of
America.
Auditor's Responsibility
Our responsibility is to express an opinion on these
financial statements based on our audit. We did not
audit the financial statements of B Company, a
wholly-owned subsidiary, which statements reflect total
assets constituting 20 percent of total assets at
December 31, 2022 and total revenues constituting 18
percent of total revenues for the year then ended.
Those statements were audited by other auditors,
whose report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for B
Company, is based solely on the report of the other
auditors. We conducted our audit in accordance with
auditing standards generally accepted in the United
States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance
about whether the financial statements are free from
material misstatement.
(No revisions to remainder of the section)
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RELATED PARTIES
Philippine Standard on Auditing 550 Related Parties
(Related Parties)
Scope
This standard deals with the auditor’s responsibility
relating to related party relationship (PAS 24) and
transactions in audit of financial statements.
Nature of Related Party Relationship and Transactions
Responsibilities of auditor
Question: Is there any situation in which a non-disclosure
of related party is in compliance of relevant Framework
but is misleading?
● If the entity derives a very substantial portion of
its revenue from transaction with related parties,
and that fact is not disclosed.
Some other considerations
● Fraud risk factors
● Professional Skepticism
● Inherent Limitations
● Management is unaware
● Concealment by management
Objectives
● Obtain appropriate audit evidence that all related
party transactions have been identified and
accounted for.
● Recognized fraud risk factors.
● To conclude that Financial Statements are fairly
presented or not misleading.
Arm’s length transaction
● Willing buyer and willing seller
● Unrelated
● Acting independently
● Pursuing their own best interest
Related party
● As defined in the applicable Financial Reporting
Framework.
● A person or other entity has
○ Direct or indirect control
○ Significant influence
Over reporting entity or vice versa.
● Another Entity under common control with the
reporting entity through having
○ Common controlling ownership
○ Owners who are close family members
Control
● Power to govern financial and operating policies
of an entity
Significant influence
● Power to participate in financial and operating
policy decisions of the entity
● But is not control over such policies
Question: If two entities are under common control by
estate or local government whether
those can be called related parties?
Common control by state
Such entities are not considered related
unless they engage in:
● significant transitions
● share resources to a significant extent with one
spec ind | catherine ilao, lara gumpal | 11
 another
Risk Assessment Procedures
● Discussion Among the engagement team
● Inquiries from management
● Understanding of control environment
Discussion among the engagement team
● Nature and extent of entity’s relationship.
● Importance of professional Skepticism.
● Record and document indicating relationship.
● How related party may be involved in fraud.
● Related party relation indicators
○ Organizational structure
○ Inadequate information system
○ Special purpose entities for earning
management
Earnings management
Is a strategy used by the management of a company to
deliberately manipulate the company's earnings so that
the figures match a predetermined target.
Inquiries from management
● Identity of entity’s related party
● Nature of relationship
● Transactions with related party if any
● Internal control
● Transactions in
○ Normal course of business
○ Other than normal course of business
Understanding of control environment
● Internal ethical code
● Policies and procedures for disclosures
● Responsibility assignment
● Management’s discussions
● Transaction’s approval method
● Internal auditor’s reviews
● Actions taken by management
● Whistle-blowing policies
Reasons for deficiency of controls
● Low importance
● Lack of oversight
● Intentional disregard
● Insufficient understanding of framework
● Absence of disclosure requirement in framework
Indicators of related party relationships and
transactions
● Bank and legal conformation
● Minutes of the meeting
● Entity’s income tax return
● Shareholders register
● Records of investments
● Contracts and agreements with related party
● Correspondence of legal advisers
● Life insurance policy
● Internal auditor report
Related parties with dominant influence
● Domination of management by one or more
person is a fraud risk factor
● Take appropriate action in accordance with PSA
240
Indicators of dominant influence
● Veto power
● Control over final approval
● Unquestioned decisions
● Approval of Transaction without review
Indicators of material misstatement
● High turnover of senior management
● Unjustified transactions through intermediaries
● Excessive participation in selection of
● accounting policies
Responses to the assessed risk
● Auditor should reassess the nature, timing &
extent of further audit procedures
Substantive audit procedures
● Confirmations from third parties
● Inquires from management
● Inquires from related parties
● Reading Financial Statements
● Inspections of significant contracts
● Appropriate background research
Discovery of Undisclosed Related Parties
● Communicate to engagement team members
● Identification of all transactions with such
parties
● Inquiry about internal control failure
● Apply substantive procedures
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 ● Reassess risk that other unidentified or ● Oral representations by management
undisclosed RPs or RPTs may exist ● Financial or other interest in RP

Intentional Non Disclosure Communication with Those Charged With Governance

● Indicative of material misstatement due to fraud (TCWG)
and error. ● Non disclosures by management
● Consider requirements of PSA-240 ● Inappropriately authorized and approved
● Re-evaluate reliability of management’s transactions
responses. ● DPS Agreement with management
● Non compliance with applicable laws
Significant RPTs Outside Normal Business ● Difficulties in identifying the controlling entity

● Inspection of
○ Business rationales
○ Terms of transactions
○ Transactions accounted
disclosed
● Transactions are authorized and approved
Evaluation of business rationales
Consider weather Transactions
● Is overly complex
● Has unusual terms of trade
● Lacks logical business reasons
● Involves unidentified parties
● Processed in unusual manner
Evaluation of Accounting and Disclosures
Transactions
● Transactions should be accounted for and
disclosed in accordance with applicable
● Financial Reporting Framework.
● The disclosures should be understandable and
should include
○ Business rationales
○ Key terms
○ conditions
Written Representation
There are some circumstances in which it is
appropriate to obtained written representation from
those charge with governance.
Circumstances
● Approval of specific transaction
○ having material effect on the financial
statement
○ Involvement of management
KEY AUDIT MATTERS
for and Philippine Standard on Auditing 701
Key Audit Matters in the Independent Auditor’s Report
(Key Audit Matters)
Scope
● This International Standard on Auditing (ISA)
deals with the auditor’s responsibility to
communicate key audit matters in the auditor’s
report.
● The purpose of communicating Key Audit Matter
(KAM) is to enhance the communicative value of
the auditor’s report by providing greater
transparency about the audit that was
performed.
of
Key Audit Matter
● Those matters that, in the auditor’s professional
judgment, were of most significance in the audit
of the financial statements of the current period
● It is selected from matters communicated with
those charged with governance
Auditor’s Report Include a Key Audit Matter Section
● The auditor’s report for audits of financial
statements of listed entities
● Also in the auditor’s reports for entities other
than listed entities where:
○ Law or regulation may require Key Audit
Matter
○ Auditors may voluntarily, request or at
management or of Those Charged With
Governance, communicate Key Audit
Matter

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Decision Making Framework on these matters.

Form and content in case of no key audit matter

If the auditor determines that there are no key audit
matters to communicate , the auditor shall include a
statement to this effect in a separate section of the
auditor’s report under the heading “Key Audit Matters.”

Description of Key Audit Matter

The description always includes:
● Why the matter was considered to be a key audit
matter
● How the matter was addressed in the audit
● Reference to the related disclosure(s), if any
Initial Step in Determining Key Audit Matter
The auditor will always consider:
Documentation
● Areas of higher assessed risks of material The auditor have to document the professional
misstatements or significant risks. judgments made about:
● Significant auditor judgements relating to areas
● Why a matter that required significant auditor
of significant management judgment.
attention is or is not a key audit matter
● Effect on the audit of significant events or
● If there are no key audit matter, the rationale
transaction
● Why a matter determined to be a key audit
matter is not communicated
Determination of matters if most significant in the audit
Key Audit Matter is determined by the auditor’s
Effective Date
consideration of:
● This PSA is effective for audits of financial
● Nature and extent of communication with Those
statements for periods ending on or after
Charged With Governance
December 15, 2016.
● Importance to intended users’ understanding
● Nature and extent of audit effort
● Severity of any control deficiencies identified
relevant to the matter
● Nature and materiality, of the misstatements
due to fraud or error

Communicating Key Audit Matters

The auditor shall describe each key audit matter, using
an appropriate subheading, in a separate section of the
auditor’s report under the heading “Key Audit Matters,”.

The introductory language in this section state

that:
a. Key audit matters are those matters that, in the
auditor’s professional judgment, were of most
significance in the audit of the financial
statements
b. These matters were addressed in the context of
the audit of the financial statements as a whole,
and in forming the auditor’s opinion thereon, and
the auditor does not provide a separate opinion

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