3.

Risk-based Financial Statements Audit Process, Responsibilities and Objectives

Reference:
a. PSA 200 (Revised and Redrafted), Overall Objectives of the Independent Auditor and the Conduct
of an Audit in
Accordance with Philippine Standards on Auditing

The Risk-Based Audit Process

• In accordance with professional and ethical standards, the auditor shall perform a quality audit. In
achieving a quality audit, the auditor shall conduct the audit with the exercise professional judgment
and maintain professional skepticism throughout the planning and performance of the audit and,
among other things:
1. Identify and assess risks of material misstatement, whether due to fraud or error, based on an
understanding of the entity and its environment, including the entity’s internal control.
2. Obtain sufficient appropriate audit evidence about whether material misstatements exist, through
designing and implementing appropriate responses to the assessed risks.
3. Form an opinion on the financial statements based on conclusions drawn from the audit evidence
obtained.
• The audit process, described above, is presented in the following three audit phases:
1. Risk Assessment
2. Risk Response
3. Concluding and Reporting

Phase 1—Risk Assessment

Client Acceptance and Continuance
• In this phase, the auditor makes a critical decision about whether to accept an audit engagement of
a new client or to continue an audit of an existing client. In the case of initial audit, the auditor
communicates with the previous auditor to aid in making the said decision. If the auditor determines
that the client is acceptable, the auditor agrees the terms of engagement and documents the same in
an audit engagement letter.
Planning and Assessing Risks
• To effectively (and efficiently) perform an audit, the auditor should plan the audit. As part of this
planning process, the auditor obtains understanding of the entity (client), its environment and its
internal control. This understanding serves as the very frame of reference how the audit is conducted
and upon which the auditor exercises professional judgment and maintains professional skepticism.
• The auditor also, in this phase, determines materiality applicable to the financial statements,
identifies material accounts and disclosures in the financial statements, and assesses the risks of
material misstatement of the financial statements.
• The auditor then uses the results of this phase as a basis when designing and performing
responses in the next phase to obtain sufficient appropriate audit evidence.

Phase 2—Risk Response

• Once the risks of material misstatement of financial statements have been identified and assessed,
the auditor then designs and implements appropriate responses to those risks in order to obtain
sufficient appropriate audit evidence about the assessed risks of material misstatement to reduce
audit risk to an acceptably low level.
• The auditor’s responses include overall responses and further audit procedures to address risks at
the financial statement level and assertion level, respectively. This phase is the main audit evidence
gathering and evaluation.

Phase 3—Conclusion and Reporting

• This phase of the audit demands careful and thorough review of the auditor. The judgments made
during this phase of the audit are often crucial to the ultimate outcome of the engagement. The
procedures covered in this stage of audit often bring to light matters that are of major concern in
forming an opinion on the financial statements.
• After the planned audit procedures have been performed, an evaluation of the results will take
place. The auditor shall:
1. Form an opinion on the financial statements based on an evaluation of the conclusions drawn from
the audit evidence obtained; and
2. Express clearly that opinion through a written report that also describes the basis for the opinion/.

• The auditor’s report shall be in writing (hard copy format or an electronic medium). That report
contains the following opinions depending on the outcome of engagement:
a. Unmodified (Unqualified or Clean) opinion—The opinion expressed when the financial statements
are prepared, in all material respects, in accordance with the applicable financial reporting framework.
b. Modified opinion—The three types of are:
1. Qualified opinion—The auditor is satisfied that the financial statements are presented fairly, except
for a specific aspect of them.
2. Adverse opinion—The auditor does not believe the financial statements are fairly presented.
3. Disclaimer of opinion—The auditor does not know if the financial statements are presented fairly.

Gathering Audit Evidence and Documentation

• From the start to end of the audit, the auditor gathers and accumulates audit evidence and
documentation that supports the opinion to be expressed.
Maintaining Audit Quality
• Quality audit means that the audit is performed in accordance with relevant ethical, professional,
legal, and regulatory requirements.
Relevant Ethical Requirements
• Relevant ethical requirements ordinarily comprise Parts A and B of the Code of Professional Ethics.
The fundamental principles, in accordance with the code of ethics, applicable to audit of financial
statements are:
1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional behavior
• In addition to fundamental principles, the code also requires professional accountants to be
independent when performing audits, both of mind and in appearance.

Audit in Accordance with PSAs

• The auditor shall comply with all PSAs relevant to the audit. A PSA is relevant to the audit when the
PSA is in effect and the circumstances addressed by the PSA exist. The auditor shall not represent
compliance with PSAs in the auditor’s report unless the auditor has complied with the requirements of
this PSA and all other PSAs relevant to the audit.
• If an objective in a relevant PSA cannot be achieved, the auditor shall evaluate whether this
prevents the auditor from achieving the overall objectives of the auditor and thereby requires the
auditor, in accordance with the PSAs, to modify the auditor’s opinion or withdraw from the
engagement. Failure to achieve an objective represents a significant matter requiring documentation.

Professional Judgment
• The ability of the auditor to exercise judgment that is professionally made is often described as the
hallmark or trademark of auditing. Professional accountants are engaged to audit of financial
statements because of their ability to exercise professional judgment.
• Professional judgment is the application of relevant training, knowledge, and experience, within the
context provided by auditing, accounting and ethical standards, in making informed decisions about
the courses of action that are appropriate in the circumstances of the audit engagement.
• The auditor shall exercise professional judgment in planning and performing an audit of financial
statements. It is essential to the proper conduct of an audit because it enables the proper
interpretation of:
§ Relevant ethical requirements
§ PSAs
§ Informed decisions
• Professional judgment is necessary in particular regarding decisions about:
§ Materiality and audit risk
§ Nature, timing, and extent of audit procedures
§ Evaluating whether sufficient appropriate audit evidence has been obtained
§ Evaluating management’s judgments in applying the applicable financial reporting framework
§ Drawing of conclusions, for example, assessing the reasonableness of the management’s
estimates
Professional Skepticism
• It is believed that professional skepticism is the auditor’s best method to detect fraud in the financial
statements.
• Professional skepticism is an attitude that includes a questioning mind, being alert to conditions
which may indicate possible misstatement due to error or fraud, and a critical assessment of audit
evidence. The auditor shall plan and perform an audit with professional skepticism recognizing that
circumstances may exist that cause the financial statements to be materially misstated.
• Professional skepticism includes being alert to, for example:
§ Audit evidence that contradicts other audit evidence obtained
§ Information that brings into question the reliability of documents and responses to inquiries to be
used as audit evidence
§ Conditions that may indicate possible fraud
§ Circumstances that suggest the need for audit procedures in addition to requirements of PSAs
• Maintaining professional skepticism throughout the audit is necessary if the auditor is, for example,
to reduce the risks of:
§ Overlooking unusual circumstances.
§ Over generalizing when drawing conclusions from audit observations.
§ Using inappropriate assumptions in determining the nature, timing, and extent of the audit
procedures and evaluating the results thereof.

The figure below shows the roadmap of the risk-based audit process. The course outline1 for our
auditing review follows the order of the procedures indicated in this roadmap:

Audit Evidence and Documentation

Risk Assessment Risk Response Conclusion &
Reporting
RISK BASED AUDIT PROCESS
Client Acceptance & Responding to Completing the audit &
Continuance assessed forming an opinion on
risks on financial the
statements level financial statements
Planning an Audit Extent of testing Issuing the
auditor’s report
Professional Considering materiality Responding to Post-audit Professional
Skepticism and audit risk assessed responsibilities Judgment
risks on including final
assertions level assembly of audit files
(TOC & ST)
Understanding the Frauds, errors,
entity and
& its environment noncompliance
(including internal with laws &
controls regulations
Identify & assess risks Considering the
of work of
material misstatements others
Audit Quality