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Overview of the Auditing Profession

• An audit is a three-party relationship, it involves providing financial reports with sufficient appropriate evidence
• The results of an audit must be communicated to interested users
• An engagement in which a practitioner expresses a conclusion that is designed to enhance the degree of confidence of the intended customer is an assurance engagement

Assurance vs. Auditing

• The objective of accounting is to identify, record, and communicate the economic events of an organization to interested users
• The objective of auditing is to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework
• The objective of accounting is performed by Accountants/Bookkeepers
• The objective of auditing is performed by Certified Public Accountants
• Accounting is guided by Philippine Financial Reporting Standards
• Auditing is guided by Philippine Standards on Auditing
• The output for accounting is Financial Statements, Management Reports, and Other Reportorial Requirements
• The output for auditing is an Independent Auditor's Report

Elements of Assurance Engagement

• A three-party relationship exists
• There is an appropriate subject matter
• Suitable criteria is determined
• Sufficient appropriate evidence is obtained
• A written assurance report is delivered

Why An Audit is Important

• Audits are required by law
• Audits can address potential bias or conflicts of interest
• Audits mitigate concerns of remoteness
• Audits address the complexities of financials
• Consequences of poor financial analysis can be unreliable or erroneous and can result in bad decisions leading to significant losses

Different Types of Audits

• Financial Statement Audit
• Operational Audit
• Compliance Audit
• Information Systems Audit
• Forensic Audit
• Internal Audit

Audit Process Steps

• Preliminary Activities
• Planning
• Fieldwork
• Completion

What Are Management Assertions?

• Existence
• Completeness
• Occurrence
• Accuracy
• Cut-off
• Classification
• Valuation and Allocation
• Rights and Obligations

Different Audit Procedures

• Inquiry
• Inspection
• Observation
• Analytical procedures
• External confirmation
• Recalculation
• Reperformance

Audit Evidence

• Audit evidence should be sufficient, meaning of adequate quantity.
• Audit evidence should be appropriate, meaning of adequate quality
• Audit evidence needs to be properly documented to support the audit opinion and compliance with auditing standards and regulatory requirements.

Different Audit Opinions

• Unmodified/Unqualified
• Qualified
• Adverse
• Disclaimer

Objectives of Regulatory Bodies and Professional Standards

• Become familiar with the regulatory bodies and professional standards and other regulatory and legal requirements governing the profession, namely:
  • Philippine Accountancy Act of 2004
  • Code of Ethics for Professional Accountants in the Philippines

Relevant Bodies and Organizations

• Professional Regulatory Board of Accountancy (BOA)
  • Mandated (RA 9298: Philippine Accountancy Act of 2004) to supervise, control and regulate the practice of accountancy in the Philippines
    • Standardize and regulate accounting education.
    • Conduct examinations for registering CPAs.
    • Supervise, control, and regulate the practice of accountancy in the Philippines.
• Auditing and Assurance Standards Council (AASC)
  • Authorized to establish and promulgate generally accepted auditing standards (GAAS); Adopts standards and practice statements issued by the International Auditing and Assurance Standards Board (IAASB).
• Philippine Institute of Certified Public Accountants (PICPA)
  • An accredited professional organization of CPAs by the PRC that aims to promote, uphold and maintain high standards in the accountancy profession and protecting public interest.

Philippine Accountancy Act of 2004

• Article I: Title, Declaration of Policy, Objective and Scope of Practice
  • An act to regulate the practice of accountancy in the Philippines
  • The practice of accountancy shall include, but not limited to the following: • Practice of Public Accountancy • Practice in Commerce and Industry • Practice in Education/Academe • Practice in the Government
• Article II: Professional Regulatory Board of Accountancy
  • Establishes BOA and its composition (chairman and 6 members)
  • Qualification of its members
  • Term of office: 3-year term; limit of 2 consecutive terms
  • Powers and function of the Board
  • Grounds for suspension or removal from the board
  • Submission of an annual report
• Article III: Examination, Registration and Licensure
  • Qualifications of applicants • Filipino citizen • Good moral character • Holder of a BS Accountancy degree • Has not been convicted of any criminal offense involving moral turpitude
  • Scope of the examination • Financial accounting and reporting • Advance financial accounting and reporting • Management advisory services • Auditing • Taxation • Regulatory Framework for Business Transactions
  • Rating: general average of 75% with no grades lower than 65% in any subject
  • Conditional credit for subjects above 65%: Obtains a rating of 75% in majority (at least 4) of the subjects; must retake failed and pass subjects within 2 years
• Article III: Examination, Registration and Licensure
  • Take an oath of profession before any member of the Board or before any government official authorized by the Commission
  • Issuance of certificate of registration (COR) and professional identification card (PIC) • COR must bear the signature of the chairman of PRC and chairman and members of BOA and stamped with the official seal of PRC and BOA. • A holder of the COR shall be issued a PIC subject to renewal every 3 years. It should bear a registration number, date of issuance, expiry date and signature of the PRC chairman.
• Article IV: Practice of Accountancy
  • Single practitioners and partnerships for the practice of public accountancy must be CPAs and will be issued a certificate of accreditation after such registrant has acquired a minimum of 3 years meaningful experience. The accreditation is renewable every 3 years.
  • Workings papers shall be treated confidential and privileged and remain the property of the CPA.
  • Continuing Professional Education (CPE) program • Renewal of certificate of accreditation – 120 units within the last 3 years prior to renewal.
• Article V: Penal and Final Provisions
  • Violation of any provisions of the Act shall be punishable with a fine of no less than P50,000 or by imprisonment for a period not exceeding 2 years or both.

Code of Ethics for Professional Accountants in the Philippines

• Establishing the fundamental principles of professional ethics for professional accountants and provides a conceptual framework that professional accountants should apply to
  • Identify threats to compliance with the fundamental principles
  • Evaluate the threat identified
  • Address the threats by eliminating or reducing them to an acceptable level
• Fundamental principles of Professional Accountants
  • Integrity
  • Objectivity
  • Professional Competence and Due Care
  • Confidentiality
  • Professional Behavior INTEGRITY
• To be straightforward and honest in all professional and business relationships
• A professional accountant should not knowingly be associated with information that:
  • Contains materially false or misleading statements
  • Contains statements or information furnished recklessly
  • Omits or obscures information required to be included where such omission or obscurity would be misleading OBJECTIVITY
• Should not compromise their professional or business judgment because of bias, conflict of interest or the undue influence of others

Professional Competence and Due Care

• To maintain professional knowledge and skill at the level required to ensure that clients or employers receive competent professional service
• To act diligently in accordance with applicable technical and professional standards when performing professional activities or providing professional services

Confidentiality

• Respect the confidentiality of information acquired as a result of professional and business relationships
• Disclosure of confidential information is allowed when: • It is permitted by law and is authorized by the client or the employing organization; • It is required by law; and • There is a professional duty or right to disclose, when not prohibited by law such as compliance with quality review of a professional body, to respond to an investigation by a regulatory body, to protect the interest of the professional accountant in legal proceedings, or to comply with technical and professional standards.

Professional Behavior

• Comply with relevant laws and regulations and avoid any actions that may discredit the profession.
• When marketing and promoting professional services, the professional accountant must be honest and truthful and not (1) make exaggerated claims and (2) make disparaging references or unsubstantiated comparisons to the work of others. Conceptual Framework Approach
• Used to identify, evaluate and address threats to compliance with the fundamental principles. Identify Threats, Evaluate Threats, and Proceed with Engagement if acceptable.

Threats

• Self-interest threat – inappropriate influence on the professional accountant's judgment or behavior due to financial or other interest
• Self-review threat – improper evaluation by a professional accountant on their judgement or activity from another person in the accountant's organization.
• Advocacy threat – promoting the client's or employer's position that compromises objectivity
• Familiarity threat – being too sympathetic by being too accepting on client or employer's work
• Intimidation threat – being deterred from acting objectively because of actual or perceived pressure Addressing Threats
• Addressing the threats by the method of
  • Eliminating the circumstances that are creating the threats;
  • Applying safeguards to reduce the threats to an acceptable level; or
    • Exercise professional judgment
  • Determining the acceptability of Safeguard Level by a a reasonable and informed third party, weighing all specific facts and circumstances available to the professional accountant at the time

AASC Standards and Statements

-Adopted by the AASC from the standards and statements issued by the International Auditing and Assurance Standards Board (IAASB). - Engagement Standards

• Philippine Standards on Quality Management (PSQM)
• Philippine Auditing Practice Note (PAPN)
• IAASB was established by the International Federation of Accountants (IFAC) - The IAASB develops and issues high quality standards - Quality control standards for use around the world
  • Related practice statements

Engagement Standards

• Basic principles and the essential procedures to be applied to audits, review, and assurance engagement.
• Engagement Standards include:
  • Philippine Standards on Auditing (PSAs)
  • Philippine Standards on Review Engagements (PSREs)
  • Philippine Standards on Assurance Engagements (PSAEs)
  • Philippine Standards on Related Services (PSRSs)
• Philippine Framework for Assurance Engagements

Assurance Engagement Defined

• Assurance Engagement, an engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome. This covers the evaluation or measurement of a subject matter against criteria.
• Elements of Assurance Engagement:
  • Three-party relationship
  • Appropriate subject matter
  • Suitable criteria
  • Suitable appropriate evidence
  • Written assurance report

Types of Engagements

• Reasonable Assurance Engagement, the risk is reduced to an acceptably low level, using less than absolute assuranc
• Limited Assurance Engagement, reduced to an acceptable moderate level. Risk is greater than what would be seen in Reasonable assurance engagement

General information on agreed upon procedures

• Assurance engagements other than audit or review of financial statements are covered by PSAEs and may provide reasonable or limited insurance
• Engagements Standards include:
  • Philippine Standards on Auditing (PSAs)
  • Philippine Standards on Review Engagements (PSREs)
  • Philippine Standards on Assurance Engagements (PSAEs)
  • Philippine Standards on Related Services (PSRSs)
• Philippine Framework for Assurance Engagements

Philippine Standards of Quality Management (PSQMs)

• The Firm shall design and implement a risk assessment process to establish quality objectives, identify and assess quality risks and design and implement responses to address the quality risks.
• Establish the quality objectives specified by PSQM on each of the components and any additional quality objectives considered necessary by the Firm to achieve the objectives of the system of quality management. Components of PSQMs
• Goverance and leadership
• Relevant Ethical Requirements
• Acceptance and Conintuance of client relationships and specific engagements • Judgements by the firm about whether to accept or continue a a client relationship or specific engagement are appropriate Engagement Performance
• Resource needs are planned for and resources obtained, allocated or assigned in a manner that is consistent with the firm's commitment to quality
• Engagement teams understand and fulfill their responsibilities in connection with the engagements Resources
• Personnel need to be given evaluations, compensation, promotion or other incentives.
• Engagement work assignment should have competence, capabilities and include sufficient time. Information and Communication
• relevant and reliable information with the firm and with one another. Monitoring and remediation process
• actions should be remediated on a timely basis. Philippine Auditing Practice Notes
• Provide interpretative guidance and practical assistance to professional accountants to implement standards and to promote good practice.
• It has Philippine Auditing Practice Statement, Review, Assurance and Releated Service.

Client Acceptance & Continuance Decision

• Objective: To understand the standards governing the preliminary activities in an audit engagement including acceptance/continuance, agreement on terms, and assignment of teams.

• Relevant Standards:

  • PSQM 1 – Quality Control for Firms and Reviews of Financial Statements
  • PSA 210 – Agreeing the Terms of Audit Engagements
  • PSA 220 – Quality Control for an Audit of Financial Instruments
  • PSA 300 – Planning an Audit of Financial Statements

• Client Acceptance & Continuance in PSQM 1

  • Judgement on whether to accept or continue a client relationship or engagement
    • Information obtained about the nature and circumstances of the engagement
  • Integrity of the client
  • Firm's ability to perform the engagement

Information may include in regards to Client Acceptance And Continuance PSQM 1

• Circumstance of the engagement and related reporting deadline
• Availability of competent and capable individuals
• Availability of experts, if needed
• Availability of an engagement quality reviewer, if needed
• Access to technological resources/ intellectual assets
• Financial/Operational priorities of the firm

Preconditions of an Audit in PSA 210

• Management uses an acceptable financial reporting framework in financial statements.
• Management acknowledges and understands its responsibility to
  • Prepare the financial statements in accordance with the applicable financial reporting framework.
  • Implementing internal controls policies and procedures
  • Access to all relevant information and persons for the conduct of the audit. - If management imposes a limitation in the proposed scope of the auditor's work, the auditor shall no accept such a limited engagement.
• Client Acceptance & Continuance in PSA 220
  • Premised in that the firm is subject to PSA 1
    • Identified the engagement partner to perform main responsibility in the audit
    • Satisfied that the procedures regarding the acceptance and continuance of agreements
      • Decision to continue with engagement remains appropriate
    • Shall communicate immediately to the firm when/after acceptance.

Auditor and management should agree in terms

• The auditor and management should agree on the terms of the engagement
  • Should be recorded in an audit engagement letter.
  • Content should include;
  • Objective and scope of the audit
  • Responsibilities of the auditor and content
• Acceptance of a change in the terms of the audit should not occur without reasonable justification from client
  • If they do its recorded in a new arrangement letter.

Team Assignments

• Collectively have the appropriate competence and capabilities to perform audit engagement and able to perform auditable report. Preliminary Engagement Activities in PSA 300
• Perform procedures required in PSA 220 including acceptance and continuance of client relationships
• Evaluate compliance ethical requirements
• Establish and understanding in term of engagement by PSA 210

Risk Procedures and Assessment

• Objectives, To understand the risk model -Relevant standards are -
  • PSA 200 - the over-all objective with the Independent Auditor and the conduct of an audit with PSAs (200)
  • PSA 300 - (200) - Planning an audit of financial statement
  • PSA (315) – Identifying and assessing risks of material Misstatements through understanding the entity and its environment
  • PSA (320) – Materiality in Planning and performing an Audit
  • Overall objective is of Independent and overall with PSA.

What are the goals of an auditor from a P.S.A. (200.7)?

- Exercise professional judgment.

• The auditor will retain skepticism throughout planning
• performance-Identify/access risk of material misstatement based on understanding in the entity
• performance -Obtain sufficient audit evidence about whether material mistatements
• Form and opinion on the F.S. based on auditor evidence. - Performing material efficiently for members of the audit team

Audit planing, Overall strategy

Characteristics of the Engagement

• Is the objectives to plan the timing Significant factors in directing the engagement term
• The team should understand and assess the entity and its environment In assessment , identify any material misstatements

Auditors also need to plan

Auditors needs to plan in compliance with P.S.As Also; review Size and complexity of the entity, Assessed risk of material misstatements’ and Capabilities Risk identify asses of material misstatement Including internal controls

What is misstatement P.S.A. ( 200)?

Difference in presentation, financial statement etc. With applicable reporting framework can arise of or fraud In accordance with or fraud Materiality P.S.A. 320 of users as group P.S 3.20 Material, if individually it can influence Materiality is the light of something Considers common needs by Materiality is used in audit opinion During planing make judgements on the size of misstatements These judgements provide a basis to determine nature

What do auditors assume with financial statements

Have reasonable knowledge Understand That fess are prepared presented and audited to levels of materiality Recognize the use of judgement Estimates

• Make reasonable decision on the basis of feds

Determination of Overall Materiality P.S.A.

-  % applied to a benchmark
-  Factors considered in choosing benchmark is elements of F.S used

Examples such as profit before tax total and revenue, gross

More points during quality control

• Audit procedures need to test the auditor's preception of the financial information of users and circumstances
• A proper evaluation with a view to uncorrected misstatements in a proper and timely manner

P.S.A. 315- risk assessment objectives

• To identify the processes based in fraud or error and assertion levels Also; understand the nature, timing the extent and procedures Also the risks of the clients
• Internal controls, Risk assessment and Information with communication and Monitoring 320

Risk can be tested by P.S.A.315

• Inquiries of management and analytics Test the internal controls by
• Relevant by industry Factors

Some financial statements are more risky

Significant Risks Requires special considerations Fraud may exist related significant economies' Degree of subjectivity is increased. Normal may exist

Audit risk PSA 200: The auditor will express in inappropriate nature

• risk the auditor presses in inappropriate nature Risk has 2 levels assertion level risk factors have 2 levels
• Has controls and Risk model and assessment should The auditor should set at designed level