Module 1 Overview of The Risk-Based Audit Process

OVERVIEW OF THE RISK
BASED AUDIT PROCESS

CHAPTER 1
OUR LADY OF FATIMA

UNIVERSITY
Professor : Bernadette Kho Dimzon QUEZON CITY 10/02/2020 1
LEARNING OBJECTIVES
 Describe the nature of auditing
 Describe the objectives of the Independent Auditor
and conduct of an audit in accordance with
Philippine Standards of Auditing
 Distinguish between risk-based audit process
 Describe the activities in the risk-based audit
process
Professor : Bernadette Kho Dimzon 10/02/2020 2

LEARNING OBJECTIVES
 Explain the factors to consider in implementing the
Audit Risk Model

 Explain the limitation of the Audit Risk Model

AUDITING -DEFINED
 Is a systematic process by which a competent ,
independent person objectively obtains and
evaluates evidence regarding assertions about
economic actions and events to ascertain the
degree of correspondence between those
assertions and established criteria and
communicating the results to interested users

OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND
THE CONDUCT OF AN AUDIT IN ACCORDANCE WITH PSA 200
 The Philippine Standards of Auditing (PSA)

establishes the independent auditor’s overall
responsibilities when conducting an audit of
financial statements
 It sets out the overall objectives of the auditor and
explains the nature of the scope of an audit
designed to enable the auditor to meet these
objectives
 It also explains the scope, authority and structure

of the PSAs and include requirements to establish
the general responsibilities of the independent
auditor applicable in all audits , including obligation
to comply with PSAs

 In conducting audit of financial statements, overall

objectives are :
o To obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement
whether due to fraud or error, there by enabling the auditor
to express an opinion on whether the financial statements
are prepared , in all material respects, in accordance with
applicable financial reporting framework; and
 In conducting audit of financial statements, overall

objectives are :
o To report on the financial statements and
communicate as required by the PSAs, in
accordance with the auditor’s findings

 The purpose of an audit is to enhance the degree

of confidence of intended users of the financial
statements
 This is achieved through the expression of an
opinion by the auditor 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 PSA and relevant
ethical requirements enables the auditor to form an
opinion

 Audit of financial statements is an assurance

engagement as defined in the Philippine Framework
for Assurance Engagements
 The framework defines and describes the elements
and objectives of an assurance engagement

 The PSAs apply the framework in the context of an

audit of financial statements and contain the basic
principles and essential procedures together with
related guidance to be applied in such an audit

FUNDAMENTALS OF ASSURANCE ENGAGEMENT
 RELEVANCE OF AUDITING AND ASSURANCE
o The concepts and principles on auditing and
assurance introduce students to the theories
underlying auditing services and provides
opportunities to develop technical expertise in
applying the concepts learned

o Financial statement users need to have an
understanding of the audit function in order to better
appreciate the assurance provided by an independent
auditor on the fairness of the financial statements
o An understanding of auditing would also clarify the
extent of responsibilities assumed by the company
management and the auditor
o Auditing skills in risk management and evidence
accumulation and evaluation can be used in many
non-audit situations such as when assessing one’s
academic performance, verifying news and hearsay,
reading the newspaper and watching televised
advertisements

o By studying auditing theory , students acquire these
skills and develop a professionally skeptical attitude
(i.e. and attitude of questioning mind)
o Students gain a deeper understanding of the ethics
underlying the practice of one’s profession

o They become familiar with situations which they
might encounter in the actual practice of the
profession and learn about the safeguards they must
take in order to handle these situations

o Everyday people makes decisions: What time to
wake up?; What clothes to wear?; What breakfast to
eat?; How to get to work?; what time to go home?;
o The list of decisions to be made is virtually endless
o Making decision in life is unavoidable

o Consider the following situations:
 A professor tells you that your book in accounting is
obsolete and must be replaced
 The appliance store advertises a certain MP3 player
as “ the best value for your money”
 A doctor advises you to take an anti-flu shot

 Management of ABC Company distributes quarterly
reports showing a 15% increase in net income
compared to the net income for the same period last
year
 A political company shows that Mr. Ronald Pump is
the “man for the people, the best choice for President”
 All of these situations require making decisions
 Your decisions ( to get a new book, to buy MP3
player, Get the anti-flu shot, buy shares from ABC
Company or vote for candidate pump) will depend on
what you know about each of the available
alternatives
 Every decisions and actions are influenced by
information made available
 The relevance and reliability of information is critical
for making the best decision in a given situation

o We must consider that not all information are
accurate , some maybe erroneous, worse, fraudulent
and intentionally misstated
o But we must always consider reliable information
that is fairly stated, information that presents a true
and fair view of what it purports to represent

o The reliability of information depends on the
credibility of the source of the information and the
ability to verify its accuracy or fairness
o People avoid biased or misleading information
because misleading information may lead to
ineffective decision making

 EXAMPLES OF DECISION MAKING MADE BY USERS OF
FINANCIAL STATEMENTS
USERS OF FINANCIAL STATEMENTS ECONOMIC DECISIONS

INVESTORS Buy, hold or sell shares invested in
company
CREDITORS Whether to approve loan applied by
debtor or borrower
GOVERNMENT Implement and monitor compliance from
business entities of tax rules and
regulation

 EXAMPLES OF DECISION MAKING MADE BY USERS OF

FINANCIAL STATEMENTS
USERS OF FINANCIAL STATEMENTS ECONOMIC DECISIONS

CUSTOMERS Whether to continue doing business with
a supplier of find alternative supplier
EMPLOYEES Security of tenure from a certain
employer . Demand salary increase and
other benefits


o Decisions in using financial statement information
depends on the analyses that will be made and
provided by the company about assets, liabilities,
equity, income and expenses etc.
o Analyses of computed ratios presented in the

 ASSURANCE SERVICES (NATURE AND
OBJECTIVE)
o Are three party contract in which assurers (such as a
Independent CPA) reports on the quality of
information
o Enhanced the credibility of the information about a
subject matter ( such as the financial statement) by
evaluating whether the subject matter conforms
OBJECTIVE)
o In all material respects with suitable criteria
o Example: ABC Corporation prepares annual financial
statements for its stakeholders (i.e. investors,
creditors, the government and other users) These
users may have doubts on the fairness and reliability

OBJECTIVE)
o Of the financial statements regarding the information
contained within. Through engaging the services of
an Independent CPA (external auditor) who will audit
and check financial information in the financial
statements and their recognition compliance with
generally accepted accounting principles or
OBJECTIVE)
o Philippine Accounting Standards (PAS) and other
regulatory standards and framework . An audit report
shall be created and signed by the Independent CPA
and will be attached to the audited financial
statements

OBJECTIVE)
o Users rely on audited financial statements because
these statements have credibility they can relied
upon
o The Independent CPA’s audit report provide an
assurance that the financial statements are fairly
stated
OBJECTIVE)
o It sets that financial statement users are free from
the fear that they will make the wrong decisions
because of wrong and misstated information

 ASSURANCE SERVICES (ELEMENTS)
o A three party relationship involving the CPA
practitioner, a responsible party (management) and
intended users (stakeholders)
o An appropriate subject matter
o Suitable criteria
o Sufficient appropriate evidence
 ASSURANCE SERVICES (ELEMENTS)
o A written assurance report in the form of appropriate
to a reasonable assurance engagement or a limited
assurance engagement
o All these elements must be present to consider an
assurance engagement

 THREE-PARTY RELATIONSHIP
o Assurance engagements involve three separate
parties:
o Independent CPA practitioner
o An entity’s senior management (intended user) may
engage a practitioner to perform an assurance
engagement on a particular aspect of the entity’s
activities that is then immediate responsibility
 THREE-PARTY RELATIONSHIP
o Of a lower management level (the responsible party)
for which the senior management is ultimately
responsible

 EXAMPLES OF RESPONSIBLE PARTIES AND
INTENDED USERS
Investors, creditors, government and other financial
From statement users (intended users) may seek assurance
different About the fairness of the presentation of the financial
entities statements that the company management (responsible
party) has prepared

 EXAMPLES OF RESPONSIBLE PARTIES AND

INTENDED USERS
From a two-tier board structure, the supervisory board

From the (intended user) may seek assurance about information
same provided by management board of the entity
entity (responsible party)

 THREE-PARTY RELATIONSHIP- INDEPENDENT

CPA PRACTITIONER
o The term “practitioner” is the “external auditor” as
termed in the professional standards which relates
only to practitioners performing audit or review
engagements with respect to historical financial
information

CPA PRACTITIONER
o A practitioner maybe requested to perform
assurance engagements on a wide range of subject
matters
o Some subject matters require specialized skills and
knowledge beyond those ordinarily possessed by an
individual practitioner
CPA PRACTITIONER
o The practitioner should not accept an engagement if
preliminary knowledge of the engagement
circumstances indicate that ethical requirements
regarding professional competence may not be
satisfied

CPA PRACTITIONER
o Professional competence can be satisfied by the
practitioner using the work of persons from other
professional disciplines referred to as experts
o When this happens, the practitioner should be
satisfied by those persons carrying out the
engagement collectively possess the requisites
CPA PRACTITIONER
o Of skills and knowledge that the practitioner has an
adequate level of involvement in the engagement
and understanding of the work which any expert can
used

 THREE-PARTY RELATIONSHIP- RESPONSIBLE
PARTY
o The responsible party is a person (or persons)
responsible for the subject matter information (the
assertion) in an assurance engagement

 SUBJECT MATTER INFORMATION AND RESPONSIBLE
PARTY IN AN AUDIT OF FINANCIAL STATEMENTS
Financial position, financial performance
SUBJECT MATTER and cash flows of the enterprise
SUBJECT MATTER OF The financial statements of the enterprise
INFORMATION (Balance Sheet, Income Statement,
Statement of Changes in Equity, Statement of
Cash Flows and related notes)
RESPONSIBLE PARTY Client and entity management

 EXTENT OF RESPONSIBILITY OF RESPONSIBLE PARTY
RESPONSBILE FOR SAMPLE ASSURANCE ENGAGEMENT

SUBJECT MATTER A government organization engages a
INFORMATION ONLY 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
SUBJECT MATTER AND An entity engages a practitioner to perform
SUBJECT MATTER INFORMATION an assurance engagement regarding a report
it has prepared about its own sustainability
Professor : Bernadette Kho Dimzon practices 10/02/2020 47
 INTENDED USERS
o The intended users are the person , persons or class of
persons for whom the practitioner prepares the
assurance report
o The responsible party can be one of the intended users
but not the only one
o Whenever practical, the assurance report is addressed
to all the intended users but in some cases there
maybe other intended users
 INTENDED USERS
o The practitioner may not be able to identify all those
who will read the assurance report particularly where
there are large numbers of people who have access to it
o In such cases, particularly where possible readers are
likely to have a broad range of interests in the subject
matter, intended users may be limited to major
stakeholders with significant and common interests
 INTENDED USERS
o Intended users may be identified in different ways,
Example : through agreement between the
practitioner and responsible party or engaging party
or by law

 PARTIES INVOLVED IN DETERMINING
ENGAGEMENT REQUIREMENTS
o Whenever practical, intended users or their
representatives are involved with the practitioner and
the responsible party (and the engaging party if
different ) in determining the requirements of the
engagement

o Regardless of the involvement of others, however,
the practitioner is responsible for determining the
nature, timing and extent of audit procedures to be
performed in the engagement

o In addition, the practitioner is required to pursue any
matter which the practitioner becomes aware of
where such matter may lead to a material adjustment
or modification to the subject matter of information

o Example : When material errors are found in a
financial statement audit, the auditor is required to
determine the effect of these errors on the financial
statements and the type of audit report to be issued

 ASSURANCE ENGAGEMENTS FOR SPECIFIC
PURPOSE
o Intended users (for example: bankers and
regulators) impose a requirement on, or request the
responsible party (or engaging party if different) to
arrange for an assurance engagement to be
performed for a specific purpose

 ASSURANCE ENGAGEMENTS FOR SPECIFIC
PURPOSE
o When engagements are designed for specified
intended users ort specific purpose, the practitioner
considers including a restriction in the assurance
report that limits its use to those users or that
purpose

 SUBJECT MATTER
o The subject matter and subject matter of information of
an assurance engagements can take in many forms
o Subject matters have different characteristics including
the degree of information about them is qualitative
versus quantitative, objective versus subjective,
historical versus perspective and relates to a point in
time and covers a period
 SUBJECT MATTER
o These characteristics affect the precision with which
the subject matter can be evaluated or measured
against criteria and the persuasiveness of available
evidence
o In any case the assurance report notes
characteristics of particular relevance to the intended
users
 EXAMPLES OF SUBJECT MATTER AND SUBJECT MATTER OF
INFORMATION
FORM SUBJECT MATTER SUBJECT MATTER

INFORMATION
Financial Historical or prospective Recognition, measurement,
Performance or financial position, financial presentation and disclosure
Conditions performance and cash flows represented in the financial
statements
Non-financial Performance of an entity Key indicators of efficiency
performance and and effectiveness
conditions

INFORMATION

INFORMATION
Physical Capacity of Facility Specification document
Characteristics
Systems and An entity’s internal control or An assertion about

Processes IT system effectiveness

INFORMATION

INFORMATION
Behavior Corporate governance, A statement of compliance or

compliance with regulation, a statement of effectiveness
human, human resource
practices

 SUBJECT MATTER
o An appropriate subject matter is identifiable and
capable of consistent evaluation or measurement
against the identified criteria and capable of being
subjected to procedures for gathering sufficient
appropriate evidence to support a reasonable
assurance or limited assurance conclusion as
appropriate

 SUITABLE CRITERIA
o Criteria are the benchmarks used to evaluate or
measure the subject matter including, where
relevant, benchmarks for presentation and disclosure
o Criteria can be formal or less formal

 EXAMPLES : ASSURANCE ENGAGEMENTS AND
APPLICABLE FORMAL CRITERIA
ASSURANCE APPLICABLE CRITERIA

ENGAGEMENT
AUDIT OF FINANCIAL Philippine Financial Reporting Standards (PFRS)
STATEMENTS
ASSURANCE ON Established internal control framework (e.g. COSO) or
INTERNAL CONTROL individual control objectives specifically designed for
the engagement
COMPLIANCE AUDITS Applicable law, regulation or contract
o Less formal criteria are internally developed code of
conduct or an agreed level of performance (such as
the number of times a particular committee is
expected to met in a year)

o Suitable criteria are required for reasonably
consistent evaluation or measurement of a subject
matter within the context of professional judgment
o Without the frame of reference provided by suitable
criteria any conclusion is open to individual
interpretation and misunderstanding

o Suitable criteria are context-sensitive that is, relevant
to the engagement circumstances
o For the same subject matter there can be different
criteria
o Example: One responsible party might select the
number of customer complaints resolved the
acknowledged satisfaction of the customer for
o The subject matter of customer satisfaction
o Another responsible party might select the number of
repeat purchases in the three months following the
initial purchase

o The practitioner assesses the suitability of criteria for
a particular engagement by considering whether they
reflect the characteristics cited.
o The relative importance of each characteristic to a
particular engagement is a matter of judgment

o The evaluation or measurement of a subject matter
merely on the basis of the practitioner’s own
expectations, judgments and individual experience
would not constitute suitable criteria

 CHARACTERISTICS OF SUITABLE CRITERIA
EXPLANATION
CHARACTERISTICS
RELEVANCE Relevant criteria contribute to conclusions that assist
decision making by intended users
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

EXPLANATION
CHARACTERISTICS
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
NEUTRALITY Neutral criteria contribute to conclusions that are free
from bias

EXPLANATION
CHARACTERISTICS
Understandable criteria contribute to conclusions that
UNDERSTANDABILITY are clear, comprehensive and not subject to
significantly different interpretations

 ESTABLISHED AND SPECIFICALLY DEVELOPED

CRITERIA
o Established criteria are those embodied in laws
and regulations or issued by authorized or
recognized bodies of experts that follow a
transparent due process

CRITERIA
o Specifically developed criteria are those designed for
the purpose of the engagement
o Whether criteria are established or specifically
developed affects the work that the practitioner
carries out to assess their suitability for a particular
engagement
CRITERIA
o Whether established or specifically developed,
criteria need to be available to the intended users to
allow them to understand how the subject matter has
been evaluated or measured
o Criteria are made available to the intended users in
one or more of the following ways:
CRITERIA
o Criteria are made available to the intended users in
one or more of the following ways:
o Publicly
o Through inclusion in a clear manner in the
presentation of the subject matter information

CRITERIA
o Criteria may also be available only to specific
intended users, example : the term of the contract or
criteria issued by an industry association that are
available only to those in the industry

CRITERIA
o When identified criteria are available only to specific
intended users, or are relevant only to specific
purpose, use of the assurance report is restricted to
those users for that purpose

 SUFFICIENT APPROPRIATE EVIDENCE
o The practitioner plans and performs and assurance
engagement with an attitude of professional
skepticism to obtain sufficient appropriate evidence
about whether the subject matter information is free
from material misstatement

o 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

o 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
procedures

 SUFFICIENCY AND APPROPRIATENESS OF
EVIDENCE
o Sufficiency is the measure of the quantity of
evidence
o Appropriateness is the measure of the quality of
evidence; that is, its relevance and reliability

EVIDENCE
o The quantity of evidence needed is affected by the
risk of the subject matter of information being
materially misstated (the greater the risk, the more
evidence is likely to be required) and also by quality
of such evidence (the higher the quality, the less
maybe required)
EVIDENCE
o Accordingly, the sufficiency and appropriateness of
evidence are interrelated
o Merely obtaining more evidence may not compensate for its
poor quality
o The reliability of evidence is influenced by its source and by
its nature and is dependent on the individual circumstances
under which is obtained
EVIDENCE
o Accordingly, the sufficiency and appropriateness of
evidence are interrelated
o Merely obtaining more evidence may not compensate for its
poor quality
o The reliability of evidence is influenced by its source and by
its nature and is dependent on the individual circumstances
under which is obtained
 PROFESSIONAL SKEPTICISM
o The practitioner plans and performs an assurance
engagement with an attitude of professional
skepticism recognizing that circumstances may exist
that cause the subject matter information to be
materially misstated

o 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

o 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 using a faulty
assumptions in determining the nature, timing and
extent of evidence gathering procedures and evaluating
the results thereof
o Is an attitude that includes being alert to : Example
 Evidence that is inconsistent with other evidence
obtained;
 Information that calls into question the reliability of
documents and responses to inquiries to be sued as
evidence

o Is an attitude that includes being alert to : Example
 Circumstances that suggest the need for procedures
in addition to those required by relevant assurance
standards; and
 Conditions that may indicate likely misstatement

o An assurance engagement rarely involves the authentication
of documentation nor is the practitioner trained as or expected
to be an expert in such authentication
o The practitioner considers the reliability of the information to
be used as evidence , Example : photocopies, facsimiles,
filmed, digitized or other electronic documents including
consideration of controls over the preparation and
maintenance where relevant
 GENERAL CHARACTERISTICS – RELIABILITY OF
EVIDENCE
o Generalizations about the reliability of various kinds
of evidence can be made : however, such
generalizations are subject to important exceptions
o Even when the evidence is obtained from sources
external to the entity, circumstances may exist that
could affect the reliability of the information obtained
EVIDENCE
o Example : Evidence obtained from an independent
external source may not be reliable if the source is
not knowledgeable
o While recognizing that exceptions may exist, the
following generalizations about the reliability of
evidence may be useful:
EVIDENCE
o Evidence is more reliable when it is obtained from
independent sources outside the entity
o Evidence that is generated internally is more reliable
when the related controls are effective

EVIDENCE
o Evidence obtained directly by the practitioner
(Example: observation of the application of control) is
more reliable than evidence obtained indirectly or by
inference (Example: inquiry about the application fo
control)

EVIDENCE
o Evidence is more reliable when it exists in
documentary forms whether paper, electronic or
other media (Example: a contemporaneously written
record of a meeting is more reliable than a
subsequent oral representation of what was
discussed)
EVIDENCE
o Evidence provided by original documents is more
reliable than evidence provided by photocopies or
facsimiles

EVIDENCE
o The practitioner ordinarily obtains more assurance
from consistent evidence obtained from different
sources or of a different nature than from items of
evidence considered individually

EVIDENCE
o In addition, obtaining evidence from different sources
or of a different nature may indicate that an individual
item of evidence is not reliable
o Example: Corroborating information obtained from a
source independent of the entity may increase the
assurance the practitioner obtains from a
EVIDENCE
o representation from the responsible party
o Conversely, when evidence obtained from one
source is inconsistent with that obtained from
another, the practitioner determines what additional
evidence-gathering procedures are necessary to
resolve inconsistency
 COST-BENEFIT CONSIDERATIONS
o In terms of obtaining sufficient appropriate evidence ,
it is generally more difficult to obtain assurance about
subject matter information covering a period than about
subject matter information at a point in time
o In addition, conclusions provided on processes
ordinarily are limited to the period covered by the
engagement
o The practitioner provides no conclusion about
whether the process will continue to function in the
specified manner in the future
o The practitioner considers the relationship between
the cost of obtaining evidence and the usefulness of
the information obtained

o However, the matter of difficulty or expense involved I s
not in itself a valid basis for omitting an evidence-
gathering procedure for which there is no alternative
o The practitioner uses professional judgment and
exercises professional skepticism in evaluating the
quantity and quality of evidence and thus the sufficiency
and appropriateness to support the assurance report
 MATERIALITY
o is relevant when the practitioner determines the
procedures and when assessing whether the subject
matter information is free of misstatement
o When considering materiality, the practitioner
understands and assesses what factors might
influence the decisions of the intended users
 MATERIALITY
o The assessment of materiality and the relative
importance of quantitative and qualitative factors in a
particular engagement are matters for the
practitioner’s judgment

 ASSURANCE ENGAGEMENT RISK
o Risk that the practitioner expresses an inappropriate
conclusion when the subject matter information is
o It is considered when determining the nature, timing
and extent of evidence-gathering procedures

 ASSURANCE ENGAGEMENT RISK
o The more extensive the evidence-gathering
procedures the lower the chances of inappropriate
conclusion (assurance engagement risk); and the
higher the level of assurance that a practitioner can
provide

 FORMS OF CONCLUSION
o The conclusion in an assurance engagement may be
expressed positively or negatively depending on the
level of assurance being provided
o There are two levels of assurance that maybe
provided by practitioner:
o Reasonable assurance (also known as high level of
assurance)
o Limited assurance (also known as moderate level of
assurance)

o REASONABLE LEVEL OF ASSURANCE ENGAGEMENT ,
the practitioner expresses the conclusion in a positive form ,
Examples:

o “In our opinion , the financial statements present
fairly , in all material respects, the financial position
of the entity as at (date) and its financial
performance and its cash flow for the year ended in
accordance with XYZ framework

o “In our opinion , the financial statements present
fairly , in all material respects, the financial position
of the entity as at (date) and its financial
performance and its cash flow for the year ended in
accordance with XYZ framework

o “In our opinion , the (appropriate party’s) statement
that the entity has complied with XYZ law, in all
material respects, fairly stated,” or “In our opinion,
(appropriate party’s) statement that the key
performance indicators are presented in accordance
with XYZ criteria , in all material respects, fairly
stated.
o “In our opinion, the accompanying financial statements present
fairly, in all material respects, the financial position of
NOVOTECH (AUSTRALIA) PTY LTD – PHILIPPINE
BRANCH as at June 30, 2019 and 2018, and its financial
performance and its cash flow for the years then ended in
accordance with the Philippine Financial Reporting Standards
for Small and Medium-Sized Entities (PFRS for SMEs).”

o LIMITED ASSURANCE ENGAGEMENT
o The practitioner expresses the conclusion in a
negative form, Examples :

o “ Based on the procedures performed and evidence obtained,
nothing has come to our attention that causes us to believe that the
entity has not complied , in all material respects, with XYZ law.”
o While both statements express assurance, users derive more
comfort from positive assurance rather than negative assurance
o As an overly simplified example, positive assurance says “users”
the information is fairly stated, while negative assurance says
“users” I did not find a material error
o The reason for differing levels of assurance lies in the nature,
extent and timing of procedures gather evidence as a basis for
the practitioner’s conclusion
o To reiterate, The more extensive the evidence-gathering
procedures , the higher the level of assurance that a practitioner
can provide

o The practitioner may choose a “short form” or “long-form” style
of reporting to facilitate effective communication to the intended
users
o “Short-form” reports ordinarily include only the basic elements
o “Long-form” reports include other information and explanations
that are not intended to affect the practitioner’s conclusion
o The basic elements, long-form reports may describe in detail the
terms of the engagement, the criteria being used, findings relating
o To particular aspects of the engagement, details of the
qualifications and experience of the practitioner and others
involved with the engagement, disclosure of materiality levels
and in some cases, recommendations
o Whether to include such information depends on the
significance to the information needs of the intended users

o Not all conclusions are unqualified conclusions. There are
situations which may lead the practitioner to express a different
type of conclusion
o In some cases where criteria are found unsuitable or subject
matter is inappropriate, the practitioner expresses qualified
conclusion or a disclaimer of conclusion depending on hoe
material or pervasive the matter is , in some cases the
practitioner considers withdrawing from the engagement
 CLASSIFICATION OF ASSURANCE ENGAGEMENTS –
Level of Assurance
o Reasonable Assurance Engagement
o The objective of this engagement is a reduction in assurance
engagement risk to an acceptably low level in the circumstances of
the engagement as the basis for a positive form of expression of the
practitioner’s conclusion
o Example : Type of engagement would be an audit of historical
Level of Assurance
o Limited Assurance Engagement
o The objective of this engagement is a reduction in assurance
engagement risk to a level that is acceptable in the circumstances of
the engagement, but where the risk is greater than for a reasonable
assurance engagement, as the basis for a negative form of
expression of the practitioner’s conclusion. Example : Type of
engagement would be a review of financial statements
According to Structure
o Attestation Engagement
o The measurer or evaluator, who is not the practitioner measures or
evaluate the underlying subject matter against the criteria, the
outcome of which is the subject matter information
o Subject matter information can fail to be properly expressed in the
context of the underlying subject matter and the criteria

Level of Assurance
o Attestation Engagement
o And can therefore be misstated potentially to a material extent
o The role of the practitioner in an attestation engagement is to obtain
sufficient appropriate evidence in order to express a conclusion
about whether the subject matter information, as prepared by the
measurer or evaluator is free from material misstatement

Level of Assurance
o Direct Engagement
o The practitioner measures or evaluates the underlying subject matter
against the criteria and presents the resulting subject matter
information as part of, or accompanying the assurance report
o The practitioner’s conclusion in a direct engagement addresses the
reported outcome of the measurement or evaluation of the
underlying subject matter against criteria
Level of Assurance
o Direct Engagement
o In some direct engagements, the practitioner’s conclusion is, or is
part of the subject matter information

 EXAMPLES : ATTESTATION AND DIRECT
ENGAGEMENTS
o A firm is engaged to provide assurance on the total proven oil
reserves of 10 independent companies. Each company has
conducted geographical and engineering surveys to
determine reserves (subject matter)
o There are established criteria to determine whether a reserve
maybe considered to be proven which the practitioner
determines to be suitable criteria for the engagement
ENGAGEMENTS
 The proven reserves for each company as at
December 31, 2012 were as follows:
Proven Oil Reserves
(In Thousands of Barrels)
Company 1 5,200


ENGAGEMENTS
 The proven reserves for each company as at
December 31, 2012 were as follows:
Proven Oil Reserves
Company 2 725


ENGAGEMENTS
Proven Oil Reserves
Company 3 3,260
Company 4 15,000
Company 5 6,700
Company 6 39,126
Company 7 345


ENGAGEMENTS
Proven Oil Reserves
Company 8 175
Company 9 24,135
Company 10 9,635
TOTAL 104,301


ENGAGEMENTS
o The engagement could be structured in differing ways:
o ATTESTATION
 Each company measures its reserves and provides an assertion
to the firm and to intended users
 An entity other than the companies measures the reserves and
provides an assertion to the firm and intended users

ENGAGEMENTS
o DIRECT ENGAGEMENTS
 Each company measures the reserves and provides the firm with
a written representation that measures its reserves against the
established criteria for measuring proven reserves
 The representation is not available to the intended users
 The firm directly measures the reserves of some of the companies

 ATTESTATION ENGAGEMENTS
o Is an engagement in which a practitioner is engaged to issue or does
issue a written communication that expresses a conclusion about the
reliability of a written that is the responsibility of another party
o The definition implies four basic conditions that distinguish an
attestation engagement from other services
 There must be a written attestation being made by one party, the
reliability of which is of interest to another party

 An assertion is a representation or statement which may be
expressly stated or implied by the responsible party
 There must be an agreed-upon and objective criteria that can be
utilized to assess the accuracy of the assertion
 All parties must agree as to how the assertion is to be evaluated
using a common unit of measure and measurement technology

 The measurement approach should be refined enough to allow
different individuals to arrive at conclusions that are not materially
different
 The assertion must be amenable to verification by an independent
party. That is, the accountant must be able to obtain adequate,
diagnostic evidence to support or refute the assertion being made
 The accountant should prepare a written conclusion about the
reliability of the assertions
 ATTESTATION ENGAGEMENTS - EXAMPLES
 An independent audit engagements one that provides a reasonable
(but not absolute) level of assurance that the subject matter (such as
financial statements ) is free of material misstatement
 A review engagement involves a limited investigation of much
narrower scope that an audit and undertaken for the purpose of
providing limited assurance that the subject matter is presented in
accordance with identified suitable criteria

 Audits require greater scrutiny of the financial statements while
reviews consist of making inquiries and performing analytical
procedures on the statements
 Consequently, audits provide a higher level of assurance as
compared to reviews
 Assurance services have existed long before CPAs started to provide
them. AICPA has formed a Special Committee on Assurance
Services
 (chaired by Robert K. Elliot, KPMG Partner) to develop a strategic
plan for the profession’s further forays into the assurance market. These
results to several projects as follows :
o Business Performance Measurement – provides assurance about
whether the financial and non-financial information being reported
from the entity’s performance measurement system (e.g. balanced
scorecard) is reliable and whether the performance measures being
used are accurately leading the entity toward meeting its strategic
goals and objectives
o Health Care Performance Measurement – involves the
evaluation of the quality of health care , medical services and
outcome
o It looks into the health care delivery system , the medical
services provided and quality attributes associated with those
services

o Elder Care Plus –is an evaluation designed to provide assurance to
the elderly and their relatives about the quality of care being
provided by various care givers by comparing their specific
objective in providing care with actual services rendered

o Risk Assessment Services – identifies a set of risks that affect the
organization
o It also involves the study of the link between risks and
organization’s vision, mission, objectives and strategies and
development of new and relevant measures to address these
risks

o CPA WEBTRUST – Webtrust is a seal of assurance service
developed jointly by the American Institute of Certified Public
Accountant (AICPA) and Canadian Institute of Chartered
Accountants (CICA)
o Webtrust enables consumers and businesses to purchase goods
and services over the internet with the confidence that the web
site business meet high standards of business practice as set
forth in the CPA Webtrust Principles and Criteria
o INFORMATION SYSTEMS RELAIBILITY involves
evaluating whether financial and non-financial information
systems provide reliable information for operating and financial
decisions by an entity’s management

 LIMITATIONS OF ASSURANCE ENGAGEMENTS
o The highest level of performance of an assurance engagement is
reasonable assurance
o 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

 LIMITATIONS OF ASSURANCE ENGAGEMENTS
 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
 The characteristics of the subject matter (in some cases)

 NON-ASSURANCE SERVICES
o AGREED-UPON PROCEDURES
o In an engagement to perform agreed-upon procedures , an auditor is
engaged to carry out those procedures of an audit nature to which
the auditor and the entity and any appropriate third parties have
agreed and to report on factual findings
o The recipients of the report must form their own conclusions from
the report of the auditor

o AGREED-UPON PROCEDURES
o The report is restricted tot hose parties that have agreed to the
procedures performed since others, unaware of the reasons for the
procedures may interpret the results

o COMPILATION OF FINANCIAL STATEMENTS OR OTHER
INFORMATION
o In a compilation engagement, the accountant is engaged to use
accounting expertise as opposed to auditing expertise to collect,
classify and summarize financial information
o This is ordinarily entails reducing detailed data to a manageable and
understandable form without requirement to test the assertions
underlying the information
o COMPILATION OF FINANCIAL STATEMENTS OR OTHER
INFORMATION
o The procedures employed are not designed and do not enable the
accountant to express any assurance on the financial information
o However, users of the complied financial information derive some
benefit as a result of the accountant’s involvement because the
service performed with due professional skill and care

 SOME TAX SERVICES SUCH AS PREPARATION OF TAX
RETURNS WHER NO CONCLUSION IEXPRESSED AND
TAX CONSULTING
o Individuals and business leaders look to CPAs for advice on income
and business taxes strategies
o A CPA can develop tax strategies to help individuals and businesses
legally minimize tax liability
o Tax services save clients money and worry
 SOME TAX SERVICES SUCH AS PREPARATION OF TAX
RETURNS WHER NO CONCLUSION IEXPRESSED AND
TAX CONSULTING
o Non-assurance tax services also include assistance in preparing tax
returns and representation of clients to tax authorities

 MANAGEMENT CONSULTING AND OTHER ADVISORY
SERVICES
o Refers to both the industry and the practice of helping business
organizations improve their performance primarily through analysis of
existing business problems and development of plans for improvement
o Examples : Small business management, Cash management,
Compensation plan evaluation, Growth planning, Purchasing or selling
business, Measuring business performance and disaster recovery planning

Agreed-upon Procedures No conclusion is expressed by the
practitioner
Compilations No conclusion is expressed by the
practitioner
Some tax services Non-assurance if tax returns are
prepared with no conclusion
expressed. Tax consulting services are
two-party contracts
Management consulting and advisory Two-party contracts that recommend
services uses of information

ETHICAL REQUIREMENT RELATING TO AN AUDIT
OF FINANCIAL STATEMENTS
 The auditor should comply with relevant ethical requirements

relating to an audit engagements
 PSA 220, “Quality Control for an Audit of Financial
Statements”, ethical requirements relating to audit of financial
statements ordinarily comprise Part A and B of the Code of
Ethics for Professional Accountants in the Philippines effective
April 6, 2016 adopted and promulgated by the Board of
Accountancy

 PSA 220 (Revised ) identifies the fundamental principles of
professional ethics established Part A and B of the Code of
Ethics and sets out the engagement partner’s responsibilities
with respect to ethical requirements
 PAS 220 recognizes that the engagement team is entitled to
rely on a firm’s systems in meeting its responsibilities with
respect to quality control procedures applicable to the
individual audit engagement

 Example : In relation to capabilities and competence of
personnel through their recruitment and formal training,
independence through accumulation and communication of
relevant independence of information; maintenance of client’s
relationships through acceptance and continuance systems
and adherence to regulatory and legal requirements through
the monitoring process

 Philippine Standard on Quality Control (PSQC 1) “Quality
Controls for Firms that Perform Audits and Reviews of
Financial Statements and Other Assurance and Related
Services Engagements”
 Requires the firm to establish policies and procedures
designed to provide it with reasonable assurance that the firm
and its personnel comply with relevant ethical requirements

CONDUCT OF AN AUDIT OF FINANCIAL
STATEMENTS
 The auditor should conduct an audit in accordance with
Philippine Standards of Auditing (PSA)
 PSAs contain basic principles and essential procedures
together with relayed 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 explanatory and
other material that provides guidance for their explanation

STATEMENTS
 The text of a whole Standard is considered in order to
understand and apply the basic principles and essential
procedures
 In conducting an audit in accordance with PSAs , the auditor
should also be aware of and consider Philippine Auditing
Practice Statements (PAPS) applicable to the engagement
 PAPS provide interpretative guidance and practical assistance
to the auditors in implementing PSAs

STATEMENTS
o An auditor who does not apply the guidance included
in a relevant PAPS needs to be prepared to explain
how the basic principles and essential procedures in
the Standard addressed by the PAPS have been
complied with

STATEMENTS
o The auditor may also conduct the audit in
accordance with both ISAs and PSAs, there are no
fundamental differences between the IAASB
pronouncements and corresponding requirements
issued by AASC and no differences are expected in
the future
• International Auditing Assurance Standards Board (IAASB)
• Auditing Assurance Standards Council (AASC)

SCOPE OF AN AUDIT OF FINANCIAL STATEMENTS
o The term “scope of an audit” refers to the audit procedures deemed
necessary in the circumstances to achieve the objective of the audit
o In determining the audit procedures to be performed in conducting
an audit with Philippine Standards of Auditing , the auditor should
comply with each of the PSAs relevant to the audit
o The auditor should not represent compliance with PSAs unless the
auditor has complied fully with all PSAs relevant to the audit

SCOPE OF AN AUDIT OF FINANCIAL STATEMENTS
o The auditor in exceptional circumstances, judge it necessary to
depart from a basic principle or an essential procedure that is
relevant inn the circumstances of the audit, in order to achieve the
objective of the audit
o In such case , the auditor is not precluded from representing
compliance with PSAs , provided the departure is appropriately
documented as require by PSA 230 (Clarified) “Audit
Documentation”

AUDIT RISK AND MATERIALITY
o The auditor obtains and evaluates audit evidence to obtain
reasonable assurance about whether the financial statements give a
true and fair view or are presented fairly in all material respects, in
accordance with applicable financial reporting framework
o The concept of reasonable assurance acknowledges that there is risk
the audit opinion is inappropriate
o The risk that the auditor expresses an inappropriate audit opinion
when the financial statements are materially misstated is known as
“audit risk”
AUDIT RISK AND MATERIALITY
o The auditor should plan and perform the audit to reduce audit risk to
an acceptably low level that is consistent to the objective of an audit
o The auditor reduces the audit risk by designing and performing
audit procedures to obtain sufficient appropriate audit evidence to
be able to draw reasonable conclusions on which to base an audit
opinion
o Reasonable assurance is obtained when the auditor has reduced
audit risk to an acceptably low level

RESPONSIBILITY FOR THE FINANCIAL STATEMENTS
o While the auditor is responsible for forming and expressing an
opinion on the financial statements, the responsibility for the
preparation of the financial statements in accordance with
applicable financial reporting framework is that of the
management’s entity, with oversight from those charged with
governance
o The audit of financial statements does not relieve management or
those charged with governance of their responsibilities

THE RISK-BASED AUDIT PROCESS
 RISK-BASED AUDIT MODEL
o In an audit approach that begins with an assessment of the types and
likelihood of misstatement in account balances and then adjusts the
amount and type of audit work to the likelihood of material
misstatement occurring in account balances
o In risk-based audit, the audit team views all activities in the
organization first in terms of risks to strategies and objectives and
then in terms of management plans to mitigate the risk and whether
those plans are in place or operating effectively
 ACCOUNT-BASED AUDIT MODEL
o An approach wherein the auditor obtains an understanding of
control and assesses control risk for particular types of errors or
frauds in specific accounts and cycle
o Under PSAs which are risk-based , specific audit procedures vary
from one engagement to the next. The following stages are
involved in every engagement:

 PHASE 1 – RISK ASSESSMENT
o This phase involves the following activities:
o Performance of preliminary audit engagement activities to decide
whether to accept/continue an audit engagement
o Planning the audit to develop an overall audit strategy and audit
plans
o Performance of risk assessment procedures to identify/ assess risk
of material misstatement through understanding the entity

 PHASE II – RISK RESPONSE
o Designing overall responses and further audit procedures to develop
appropriate responses to the assessed risk of material misstatement
o Implementing responses to assessed risk of material misstatement to
recue audit risk to an acceptably level

 PHASE III - REPORTING
o Evaluating the audit evidence obtained to determine what additional
audit work (if any) is required
o Forming an opinion based on the audit findings and preparing the
auditor’s report

UNDERSTANDING THE AUDIT RISK MODEL
 AUDIT RISK risk that the auditor may give an unqualified
opinion on materially misstated financial statements
o The auditor always want to minimize that risk but should take into
account the costs associated with gathering the audit evidence to
minimize the risk
o It is intertwined with materiality and is influenced by engagement
risk

 ENGAGEMENT RISK with whether the auditor wants to be
associated with a particular client including loss of reputation,
inability of the client to pay the auditor or financial loss because
management is not honest and inhibits the audit process
 BUSINESS RISK risk that affects the operations and potential
outcomes of organizational activities
 FINANCIAL REPORTING RISK relates to the recording of
transactions and the presentation of the financial data in an
organization’s financial statements
 CONSIDERATIONS IMPORTANT IN INTEGRATING THE
CONCEPTS OF MATERIALITY AND RISK IN THE CONDUCT
OF AUDIT
o Audit involve testing or sampling and thus cannot provide absolute
(100%) assurance that the financial statements are free from material
misstatements without inordinately driving up the costs of audit
o Not all clients are worth accepting since audits rely on testing and to
some extent on the integrity of management , there are some clients that
an audit firm should not accept because the engagement risk is too high

CONCEPTS OF MATERIALITY AND RISK IN THE
CONDUCT OF AUDIT
o Competition for clients among audit firms is high. Clients choose
auditor based on a number of factors including fees, service,
industry, knowledge, personal rapport and ability to assist the client
o Auditors should understand society’s expectations of financial
reporting to reduce audit risk to an acceptably low level and
therefore minimize lawsuits that the users may possibly bring forth
CONCEPTS OF MATERIALITY AND RISK IN THE CONDUCT
OF AUDIT
o Risky areas of a business must be identified by the auditors to
determine which account balances are more prone to material
misstatements , how the misstatements might occur and how the client
might be able to cover them up
o Auditors need to develop approaches and methodologies to allocate
overall assessments of materiality to individual account balances
because some account balances may be more important to users
CONCEPTS OF MATERIALITY AND RISK IN THE
CONDUCT OF AUDIT
o Although audit risk is a concept , it is often illustrated as
quantitative examples : Relationship between engagement risk and
audit risk

ENGAGEMENT RISK
HIGH LOW
MODERAT
E
AUDIT RISK
Do not Set very Set within professional
accept client low standards but can be
( 1%) higher than companies
with higher
engagement risk (5%)
 RELATIONSHIP BETWEEN ENGAGEMENT RISK AND
AUDIT RISK
o Setting audit risk at 1% is equivalent to performing to statistical test
using 99% confidence level. Audit risk set at 1% implies that the
auditor is willing to take at 1% chance of issuing unqualified
opinion on materially misstated financial statements
o Audit risks set at 5% implies that the auditor is willing to take 5%
chance of issuing an unqualified opinion on materially misstated
 RELATIONSHIP BETWEEN ENGAGEMENT RISK AND AUDIT
RISK
o High level of audit risk are appropriate for clients with lower levels of
engagement risk
 Based on the assessment of engagement risk , the auditor sets the desired
audit risk
 Audit risk are oftentimes illustrated using numeric or quantitative
examples . Many audit firms use the measures associated with statistical
sampling to audit risk , e.g. setting audit risk at 1% level for high risk
clients and 5% for lower risk clients
AUDIT RISK
 Other auditing firms use a broader description of audit risk as high,
moderate or low and adjust the nature of their audit procedures
accordingly

 RELATIONSHIP BETWEEN ENGAGEMENT RISK AND AUDIT RISK
 The following general observations are considered to have influenced the
implementation of the Audit Risk Model:
o The better the company’s internal controls, the lower the likelihood of material
misstatement
o Unusual or complex transactions are more likely to be erroneously recorded
than are recurring or routine transactions
o The amount and persuasiveness of audit evidence gathered should vary
inversely with audit risk; i.e. Lower audit risk requires gathering more
persuasive evidence
AUDIT RISK
 The general premises have been incorporated into an audit risk (AR)
model with three components : inherent risk (IR) , control risk (CR)
and detection risk (DR)
 AR – IR X CR X DR
 INHERENT RISK (IR) is the initial susceptibility of a transaction
or accounting adjustment to be recorded in error , or for the
transaction not to be recorded in the absence of internal control
RISK
 CONTROL RISK (CR) is the risk that the client’s internal control system
will fail to prevent or detect a misstatement
 DETECTION RISK (DR) is the risk that the audit procedures will fail to
detect material misstatement
 Stated differently , audit risk is the risk that the auditor may give an
unqualified opinion on materially misstated financial statements
 It is influence by : (IR) the likelihood that a transaction, estimate, or
adjustment might be recorded incorrectly
AUDIT RISK
 (CR) the likelihood that the client’s internal control processes would
fail to prevent or detect the misstatement and (DR) the likelihood
that , if a misstatement occurred the auditor’s procedures would fail
to detect the misstatement
 The audit risk model may also be illustrated using a quantitative
approach with probability assessments applied to each other of the
model’s component
AUDIT RISK
 Example: Case 1 Quantitative Example of Audit Risk : High Risk
of Material Misstatement
o XYZ Mining Corporation, an audit client of Dizon and Murillo CPAs
ahs many complex transactions and weak internal control. The auditors
assess both inherent risk and control risk ate their maximum. This
implies that the client does not have effective internal control (CR) and
there is high risk that the transaction would be recorded incorrectly (IR)

RISK
o The auditors believe that engagement risk is high and have set audit risk
at the .01 level. This means that the auditors do not want to take much of
a risk that the misstatement goes undetected in the financial statements
o The effect on the extent of the audit procedures and thus, detection risk is
as follows :
o AR = IR X CR X DR ; DR = AR/ (IR X CR)
o DR = .01/ (1.0 X 1.0) = 01 OR 1%

AUDIT RISK
 In this particular case, detection risk and audit risk are the
same because the auditor cannot rely on internal control to
prevent or detect misstatements
 Instinctive Results :
 Poor controls and a high likelihood of misstatement would lead
to extended audit work to maintain audit risk at an acceptable
level
RISK
 CASE 2 : Quantitative Example of Audit Risk : Low Risk of Material
Misstatement
 Zoren Trading Corporation is an audit client of Diaz and Villa CPAs .
Zoren has simple transactions , well-trained accounting personnel,
effective internal control and no incentive to misstate the financial
statements
 The auditors previous experience with the client; an understanding of
the client’s internal controls and the result of preliminary testing
AUDIT RISK
 This year indicate a low risk of material misstatement existing in
the accounting records. The auditor assesses inherent risk as low as
50% and control risk of 20%
 Audit risk is consistent with a low engagement risk of .05%
 Detection Risk is computed at :
 DR = AR/ (IR x CR)
 DR = .05/ ( .50 x .20) = .50 or 50%
AUDIT RISK
 The auditor could therefore design tests of the accounting records with
a lower detection risk, in this situation 50%; because only minimal
substantive tests of account balances are needed to provide
corroborating evidence on the expectations that the accounts are not
 The auditor, however, would have had to test whether the controls are
operating effectively in order to support a control risk assessment of
100%
 FACTORS TO CONSIDER IN IMPLEMENTING AUDIT
RISK MODEL
 High-risk Activities
o This includes operations or events where a material misstatement
could easily occur. Example: Inventory of high-value diamonds or
gold bars held by jeweler , or a new complex accounting system
being introduced
 Existence of Large Non-routine Transactions
o Identified significant related party transactions outside the entity’s
normal course of business are to be treated as giving rise to
RISK MODEL
o Significant risks . This includes infrequent large transactions
o Examples :
o Unusual volume of routine transactions with a related party
o A major sales or supply contract
o The purchase or sale of major business assets or business segments
o Sale of busines to third party
o Routine non-complex transactions that are subject to10/02/2020
Professor : Bernadette Kho Dimzon systematic 195
RISK MODEL
o Processing are less likely to give rise to significant risks
 Matters Requiring Judgment of Management Intervention
o The assumptions and calculations used by management in
developing major estimates
o Complex calculations or accounting principles
o Revenue recognition (presumed to be a significant risk) that is
subject to differing interpretations
RISK MODEL
o Extensive manual data collection and processing
o Where management intervention is required to specify the
accounting treatment to be used
 Potential for Fraud
o The risk of not detecting a material misstatement resulting from
fraud ( which is intentional and deliberately concealed) is higher
than the risk of not detecting one resulting from error
RISK MODEL
o In evaluating whether significant risks could result from the
identified fraud risk factors and the possible scenarios and schemes
identified in team discussions, consider the following:
 Skillfulness of thew potential perpetrator
 Relative size of individual amounts manipulated

RISK MODEL
o Level of management or employee to :
 Directly or indirectly manipulate accounting records
 Override control procedures
 Frequency and extent of manipulation involved
 Possible degree of collusion
 Intentional misrepresentations being made to the auditor
RISK MODEL
o Level of management or employee to :
 Previous audit experience or concerns expressed by other persons

 LIMITATIONS OF AUDIT RISK MODEL
 Audit risk is a concept that drives the auditor’s thinking about
planning the audit and executing the audit
 CPA firms in determining their approach to implementing audit
risk model should consider the following limitations:
o Inherent risk is difficult to formally assess. Some transactions
because of their complexity are more susceptible to error but is
quite difficult to asses the level of risk independent of the client’s
accounting system
o The model treats each risk component as separate and independent
when in fact the components are not independent . It is also quite
difficult to separate a client’s material controls and inherent risk
o Audit risk is judgmentally determined
o Audit technology is not so fully developed that each component of
the model can be accurately assessed
o Auditing is based on testing and precise estimates of the model’s
components are not possible Auditors can make subjective
o Assessments and use the audit risk model as a guide

 REFERENCES :
 Cabrera, Elenita B. , Applied Auditing , 2017 Edition
 Ireneo, Jose M. et al, Auditing Assurance Principles . 2018
Edition
 Dear students: I am motivating everyone to read, study,
understand and comprehend all the learning content of
this lecture for all of these will help you and understand
Auditing and the role of an Independent Practitioner or
Professional Accountant in all aspects of life. It is very
important to gain mastery of the course

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OVERVIEW OF THE RISK

BASED AUDIT PROCESS

OUR LADY OF FATIMA

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Audit Risk Model

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 The Philippine Standards of Auditing (PSA)

 It also explains the scope, authority and structure

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 In conducting audit of financial statements, overall

 In conducting audit of financial statements, overall

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 The purpose of an audit is to enhance the degree

 In the case of most general-purpose frameworks,

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 Audit of financial statements is an assurance

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 The PSAs apply the framework in the context of an

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USERS OF FINANCIAL STATEMENTS ECONOMIC DECISIONS

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 EXAMPLES OF DECISION MAKING MADE BY USERS OF

USERS OF FINANCIAL STATEMENTS ECONOMIC DECISIONS

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 RELEVANCE OF AUDITING AND ASSURANCE

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 EXAMPLES OF RESPONSIBLE PARTIES AND

From a two-tier board structure, the supervisory board

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 THREE-PARTY RELATIONSHIP- INDEPENDENT

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 EXTENT OF RESPONSIBILITY OF RESPONSIBLE PARTY

RESPONSBILE FOR SAMPLE ASSURANCE ENGAGEMENT

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FORM SUBJECT MATTER SUBJECT MATTER

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FORM SUBJECT MATTER SUBJECT MATTER