AUDIT METHODOLOGY

PRE-PLANNING
DOCUMENTATION
 Documentation
1. MAPS

2. PARPS

3. Process Documentation and Walkthroughs

MAPS
 MAPS 300

301.M Knowledge of Business

302.MPQ Risk Assessment

301.M Knowledge of Business
 Content
Primary Client Contact

Primary Reporting Requirements

Nature and Type of Entity

Corporate and ownership structure including members of the Board and Management

Related Parties

Key advisors, financing, competitors, customers and suppliers

Information and accounting systems

Where to get this?
 Nature of the entity
Industry or sector in which the entity operates, legal and regulatory framework
applicable to the entity

Entity’s objectives and strategies

Entity’s selection and application of accounting policies

Control policies

Other relevant information

 Nature of Client’s Business

Business operations
○ Nature of revenue sources, products or services, and markets, including involvement in electronic commerce such as Internet sales
and marketing activities.
○ Conduct of operations (for example, stages and methods of production, or activities exposed to environmental risks).
○ Alliances, joint ventures, and outsourcing activities.
Industry factorsdispersion and industry segmentation.
○ Geographic
•○The market
Location of and competition,
production including
facilities, demand,and
warehouses, capacity,
offices,and
andprice competition.
location and quantities of inventories.
• Cyclical or seasonal activity.
•Regulatory factors relating to the entity’s products.
Product technology
Accounting
• Energy principles
supply and industry specific practices.
and cost.
• Regulatory framework for a regulated industry.
• Legislation and regulation that significantly affect the entity’s operations,
including direct supervisory activities.
• Taxation (corporate and other).
 Type of entity
Classification of business:
-Service
-Merchandising
-Manufacturing

Types of business according to ownership structures:

-Proprietorship 
-Partnership 
-Corporation (Stock/Non-stock)

Organized under Foreign Laws

-Branch Office 
-Representative Office
-Regional Headquarters (RHQs)
-Regional Operating Headquarters (ROHQs)
What is the importance of knowing the Corporate and
ownership structure of our prospective client?

To determine if the management is in a unique position to

perpetrate fraud (i.e incentive pressures, segregation of duties)

To determine if those charged with governance are active in

overseeing management’s tasks
 Related Parties

In meeting the ISA 315 requirement to identify and assess

the risks of material misstatement the auditor shall identify
and assess the risks of material misstatement associated
with related party relationships and transactions and
determine whether any of those risks are significant risks.
In making this determination, the auditor shall treat
identified significant related party transactions outside the
entity’s normal course of business as giving rise to
significant risks (ISA 550.13).
Key advisors, financing, competitors, customers and
suppliers

Business risks and Going Concern

Information and Accounting Systems

To have a background on what information and accounting

systems the Company is using to prevent and detect errors.
302.MPQ Risk Assessment
 Content
Fraud Risk Assessment

Business Risk Assessment

PARPS

Preliminary Going Concern

Entity Level and Internal Controls

Financial Reporting Process and Accounting Risks

Information Systems

Service Organizations
PARPS
Analytical procedures may help identify the existence
of unusual transactions, events, amounts, ratios,
trends and so on, and may help in identifying risks of
material misstatement due to fraud.

Analytical procedures should be seen as an integral

part of the pre-planning stage of the audit as they
ensure that the engagement team focuses on the key
risk areas throughout the audit process.
Document the following:
• Nature of accounts
• Expectations
• Reasons for the changes per client’s reply
• Risks associated with the account
 Accounts CY PY Reasonable Reasons for N?
Change? Y or N
Sales 1,100,000 1,000,000 Y
Cost of Sales 730,000 650,000 N The COS rate is different from the
previous years. Possible changes in
the price of the inventory sold will be
checked.
Freight out 165,000 150,000 Y
Taxes and 120,000 150,000 N Business permits would normally
licenses increase if the Company’s sales is
always increasing

Other information:
-Company’s sales is increasing yearly by 10%. No change in the
selling price of the products.
-GP rate from the previous years are consistently the same.
 Accounts CY PY Reasonable Reasons for N?
Change? Y or N

Accounts 400,000 350,000 N Will further analyse the

Receivable movement of AR. See
below computation.
Sales - services 200,000 150,000 N

Other information:
-You already inquired about the process of the preparation of the Company’s tax returns.
The accountant gave you the computations she did for the returns for your documentation.
Upon checking, amount of VAT sales for the year amounted to 100,000.
 Ratio CY PY Reasonable Reasons for N?
Change? Y or N
Sales 15,000,000 12,000,000 N
CGS 10,500,000 8,400,000 N
Prepayments: Creditable 115,000 120,000 N
withholding tax (2307)

Other information:
-Per Company’s policy, the BOD will give the management a bonus amounting to 10% of
the total sales of the Company. This incentive will then be divided to the 3 officers.
The Prepayments (CWT) last year were used as a tax credit in the previous year.
 Accounts CY PY Reasonable Change? Reasons for N?
Y or N
Accounts Payable 250,000 750,000 N The Company paid all their
payables, therefore, the
account should be nil.
Property, Plant and Equipment - gross 2,500,000 3,500,000 Y
Accumulated depreciation 2,000,000 1,800,000 N Please see below.
Loss on sale of PPE 600,000 0 N Please see below.
Depreciation 200,000 250,000 Y

Other information:
-Credit term for the purchases is 30 days. As inquired, the Company’s last purchase is on October CY. The
Company’s policy is to pay all debts in due time to maintain good working relationships with the Company’s
suppliers.
-As inquired to the accountant regarding the PPE’s movement, the Company sold its PPE for 400,000. The cost of
the equipment is 1,000,000 with carrying amount of 300,000. No other transactions were noted.
EXERCISES
Risk Report
SAMPLE
SAMPLE COMPLETED PARPS
PROCESS DOCUMENTATION
AND WALKTHROUGHS
SAMPLES
 ANY
QUESTIONS?
“You’ll know that a man is clever by his
answers, but that he is wise by his questions.”
Thank you!
 VINCENT MARC D. ERANA
• vincenterana@alasoplascpas.com
• 25th Floor, Philippine Axa Life Centre, Gil puyat Ave.,
Makati City
• Phone: 759-5090
• Mobile: 09275219038