Accounting and Assurance Principles

• Contains materials for review on accounting and assurance principles, professional ethics, and good governance.

Audit Overview

• An audit is a systematic process to gain and assess evidence about economic actions, events, and assertions.
• The goal is to determine if these assertions align with established criteria, with the results communicated to relevant parties.

Types of Audits

• Financial Statement Audit: Determines if an entity's financial statements are fairly presented in accordance with a financial reporting framework; typically conducted by external auditors.
• Compliance Audit: Reviews if an organization follows specific procedures, rules, contracts, or regulations; typically conducted by government auditors.
• Operational Audit: Examines a specific unit within an organization to measure its performance, generally performed by internal auditors.

Independent Financial Statement Audits

• Management takes responsibility for preparing and accurately presenting the financial statements, ensuring they comply with the relevant financial reporting framework..
• Auditors must independently form their opinion, subsequently expressing it, of the financial statements based on assessments carried out during the audit.
• An audit fulfills a function to provide reasonable assurance that the financial statements are free from material misstatements

Limitations of Audits

• Limitations arise from sampling risk and testing.
• Application of judgment may lead non-sampling risk.
• Reliance on management's representations and inherent limitations exist within a clients accounting / internal control systems.
• Circumstances are specific to the nature of provided evidence.

General Principles

• The code of professional ethics and standards on auditing guide financial statement audits.
• Maintaining professional skepticism remains important.

Need for Audits

• To address conflicts of interest, expertise, and potential financial consequences.
• To address the remoteness between company and shareholders

Theoretical Framework (Auditing)

• These are founded on the premise financial data remains verifiable and objective.
• It can be assumed that there is consistent application of the accounting rules
• Independence, no conflicting interests, and effective internal controls are present.
• Benefits the public, and companies can be going concerns

GAAS (Generally Accepted Auditing Standards)

• Represent benchmarks for assessing the quality of audit performance.
• These act as a minimum standard, guiding the conduct of auditors in their work.

General Standards

• Auditors require adequate technical training, maintain independence, and use due care.

Fieldwork Standards

• Auditors perform planning, understand internal control and gather evidential matter.

Reporting Standards

• Auditors apply GAAP for fair presentation, are consistent, and disclose all material information and express an opinion.

Philippine Standards on Auditing (PSA)

• PSA is the auditor's role when conducting financial statements, in accordance with PSA.
• It is released by AASC as explanations of GAAS

Practice Statements

• Additions that assist auditors' application to standards in accounting.
• It is intended to improve the accountancy profession.

System of Quality Control

• Policies that CPA's undertake to improve standards when audit and related services are performed.

Elements of Quality Control (PSA 220)

• There should be responsibilities for Leadership and quality
• Ethical standards, as well as Integrity, Objectivity, Professional Behavior, Professional Competence, Due Care,Confidentiality, must be maintained.
• Independence is imperative
• Engagement performance, direction, supervision, review, consultation, and quality control should be ensured
• Monitoring, recruitment, capabilities, and assignments must occur
• There must be acceptance of clients

Quality Control Review

• Regulation through the Professional Regulatory Board of Accountancy (BOA) mandates certifications public accountancy.
• The Quality Review Committee (QRC), formed by the PRC, conducts quality reviews of the registry.

Auditor's Responsibility

• The aim is to design an audit for detecting material misstatements and provide reasonable assurance in the financial statements.
• Misstatements may be caused by error, fraud, or noncompliance.

Error

• Refers to the unintentional misstatements in financial statements.
• It may manifest as mathematical mistakes and/or clerical mistakes
• It can also manifest due to an incorrect accounting estimate or mistakes in accounting policy (application)

Fraud

• Refers to intentional misrepresentations
• It leads to the misrepresentation of the financial position
• It may be accomplished by management, employee or third party

Responsibility (Governance)

• Management needs to establish a control environment, as well as implementing policies
• Those charged with governance, are charged to ensure entity integrity in the financial reporting systems

Auditor's Accountability

• The auditor will not prevent error and fraud
• To design an audit that provides the assurance that the FS are free from material misstatements.

Planning Phase

• Make inquiries to management to asses possibility for misstatement
• Assess the risk that fraud/error may cause the FS to contain material misstatements.

Testing Phase

• Procedures should be performed to determine whether material misstatements exist
• Conclude whether such misstatements resulted from fraud/error

Completion Phase

• Auditor should obtain written representation from the client management
• Management should revise Financial Statements only if the auditor believes there is fraud/error
• Auditors qualify or disclaim opinions on the FS if fraud cannot be fairly evaluated

Fraud Risk (Financial Reporting)

• These are associated with management's qualities, influence on internal controls, and style in financial reporting.
• Factors include management's abilities, attitudes towards internal controls, and their involvement in financial reporting.
• A fraud risk factor includes excessive participation by non-financial management or high turnover rates
• It involves the regulatory environment and the nature of an entity and its transactions

Fraud risk (Misappropriation of Assets)

• Susceptibility of assets to misappropriation.
• It pertains to the nature of the company assets and how susceptible they are to theft.
• Fraud includes poor record keeping of assets and the lack of oversight.
• It pertains to the lack of controls that prevent misappropriation of assets

Noncompliance

• Refers to intentional or unintentional actions contrary to laws/regulations. Examples: Tax evasion, insider trading, and violation of environmental laws.

Management

• Ensures operations follow legal protocols.

Auditor

• Cannot detect all instances of noncompliance.
• Can recognize noncompliance that may materially affect financial statements.

Planning Phase (Noncompliance)

• Understand the legal/regulatory framework.
• Design procedures to spot potential noncompliance.

Testing Phase (Noncompliance)

• If aware of noncompliance, assess it's impact.
• Document it, converse with management, and weigh the impact on aspects of the audit.

Completion Phase (Noncompliance)

• Obtain a written representation.
• If aware of noncompliance, request an FS revision.
• Auditors must issue qualified/adverse opinions.

Scope Limitation (Noncompliance)

• When unable to obtain sufficient data to test statements.
• Express qualified opinion/disclaimer of opinion.

Auditor Concern (Noncompliance)

• Direct and material effects on financial statements.
• Misrepresentations may conceal transactions or high level manager overriding controls.

Audit Process (Engagements)

Assertions on Transactions, Events, Balances, and Presentation/Disclosure

Assertions about classes of transactions and events:

• Concerns occurrences, completeness, accuracy, classification, and cutoff Assertions about account balances:
• Focuses on rights, obligations, existence, valuations and allocation. Assertions about presentation and disclosure:
• Accuracy, completeness, classification, and understandability

Audit Procedures

Objective is to gather evidence to support a particular assertion.

• Inspection involves physical asset examination.
• Observation involves watching a process carried out by others.
• Inquiry seeks information, and confirmation corroborates records.
• Computation checks the numerical accuracy of documents.
• Analytical procedures analyze ratios for inconsistencies.

Audit Evidence

• Information used to support conclusions and base opinions.
• Involves corroborative data and documents.

Accepting Engagements

When deciding whether to commence or reject engagement, there exists a few considerations

1. Skills through knowledge, education, and training in the areas of auditing
2. Objectivity when completing an audit
3. The service provided to the client aligns with capabilities and standards, and PSA 220 suggests the time to perform align too
4. Integrity by performing background checks with management in order to mitigate risks of clients

• It also can be accomplished by talking to other parties in the business community

Retaining

When retaining existing clients, it can happen at least once per year

• Circumstances can range from mgmt., to business and operations
• You may terminate should conditions show you shouldn't accept

Engagement Letter

• Serves as a written contract indicating the objective, responsibility, and scope Importance
• Helps avoid the misunderstanding with management
• it acknowledges the acceptance of the appointment

Recurring Audits

Unless

• Scope of audit or objective shows a misunderstanding, you shouldnt send a new letter each year
• The government, senior management, and nature/size of business changed

Components

Consider if audit components align with the type of letter sent

• It pertains also to legal requirements, legal, and objectivity for management

Audit Planning

• Forming a general strategy as well as a detailed process of expectations.
• Main objective is determining the scope of the audit procedures.
• Requirements for understanding the entity based on PSA 315

Entity Understanding

Encompasses the entity including its environment

• Knowledge of the industry, regulatory, and factors of what's external,
• Nature and objective of the entity , what they plan to do, and any related risks
• How processes are measured and the internal controls set by the entity

Engagements

Per PSA 510, the auditor does a few things to gather the evidence

• To ensure opening balances dont add misstatements
• Changes in policies are applied as needed

Overall Audit Strategy

A procedure is best performed from the minimum cost and most efficient audit. The planning should address concerns such as

• The measure to accumulate info and when to do so

Materiality

• This estimate would be taken to design an audit plan
• Materiality provides the possibility to influence the economic decision
• An Inverse relationship exists between evidence and materiality:
  • If Misstatements are high-magnitude it may require the need of evidence increases

In the field

Materiality takes effect in the planning phase to determine scope, while in completion stage it helps to evaluate misstatements

Materiality Level Determination

Alternative bases to utilize, even for when annual financial statements arent around.

• Budgeted financial statements for the prior and current year (if needed)

Audit Risk

• The risk an misstatement occurs
• The auditor believes the financial statements to be fairly and materially stated.

Risk Model

AR=Inherent Risk X control risk X Detection risk

Inherent Risk

• The potential for material misstatement without internal controls.
• Influence is affected when using an aggressive attitude within the company Complexity is related to theft and account balance calculation/judgement
• When such assessment arises, effective substantial procedures are performed.

Control risk

• That can occur in the account balance
• Can be transactions prevented or detected within an acceptable timeframe.
• Relies on the internal effectiveness
• When high, the procedures need to be as effective as possible

Detection Risk

• Procedures find possible misstatements

• Related to procedures effectiveness.

• Assurance is measured then provided.

• The auditor controls the level by performing substantive Procedure is that auditor uses his judgment of accepting assertions of a potentially materially mistaken Assess potential and related factors, use info and knowledge the client has and use analytical

Audit planning Steps

Use the right study, assess risk levels, set desired , and control risk

Materiality/Risk relationship

Inverse Relationship for both

Audit Procedure

If certain audit material is acceptable, audit risk is increased

Control/Risk (Reduction)

Use extra and controls

Test (Controls)

Analytical is to use analytical and ratio trends Audit plan Documentation is documenting expected behavior

Internal Control

Framework designed by governance to have reasonable assurance about financial reporting by employees Its concerned with policies

Component Control

Includes awareness and its importance with its entity Includes;

• Integrity and ethical value
• Responsibilities
• Organization

Risks (Assessment)

Mngmt should adapt to be analyzed and follow those business risks. Concerns reliable reliable fnancial statements It is important to follow up on trends and technological developments

Info and Communication Systems

Comes with recording and identification along with following the timely Allows also to provide the proper classifications

Communication Involvement

Responsibilities including financial reporting Procedures such as reviews, or physical security of assests

Quality Control

Process assessing of performance is high. auditors is responsible so it remains an entitiy.

Internal Control Steps

• Obtain understanding of each part

  Evaluate design

• Its activities are performed with the right individuals with documents

Test of controls

• Perform and check the procedures performed in the system

Understanding

• Document it.
• If that process in the internal controls are not sufficient, it can be high level tested

Tests (Controls)

A support for when to test any controls to obtain audit evidence

• It can be of internal or external value.

Inspections

Relatively depends with which effectiveness to process Perform testing for client on whether the client achieves proper results Audits cannot determine every control however samples need to be sufficient for every level

Operational Test

Effectiveness is made when auditor determines and use testing with assessment

Communication

The reporting that are in the mgmt, will be the ones that may have to document some control for the levels Auditors dont need to look at any material documentation Internal weaknesses are documented and formal

Computerized (Environment)

There will be the characteristics with the (CIS) Consistency will be a vital contribution

Internal Control( CIS)

General, and organization all in a CIS environment Organization in certain department and the segregations Such as operations and development and functions. The facilitation may be used with a change to systems

Adequate Security

Use and procedures for the maintenance Procedures that they will relate to the specific use of the system That processing is used for, for information so it remains to be in a certain form

Key Verification

Errors happen so it is important that verification occur Verifications and the way things are checked in relation to data, is one of those importance

Validity Check

Information will match in these inputs Limiting with reasonable amounts is expected. The completeness is important for when data is completed These are all used as they should be

Computer Testing

The process and how things need test over an objective Certain aspects of it must require more and require less. There exists some techniques

• Audits require some specific significance as information.
• Tests will try to show that it has an effectiveness to clients

Integrity Test

To have unit for the system Can be integrated with the program use

Parallel Simulation

Auditor makes a certain report Software is composed and used for the specific occasion

Snapshots

Picture the process.

System (Review flies)

Modules to be used to monitor the system