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FUNDAMENTAL PRINCIPLES Types of Assurance AS TO LEVEL AND FORMS REASONABLE LIMITED Elements of Assurance Engagement [3SECC]...

FUNDAMENTAL PRINCIPLES Types of Assurance AS TO LEVEL AND FORMS REASONABLE LIMITED Elements of Assurance Engagement [3SECC] Assurance High/Reasonable Limited/Moderate  Three-party relationship Form Positive Negative  Practitioner Example Audit engagement Review engagement ↳ governed by professional competence Inquiry Inquiry ↳ may use works of other experts Analytical Procedures Analytical Procedures  Responsible party Observation ↳ responsible for subject matter and subject matter Procedures Inspection information or both Confirmation  Intended users Reperformance ↳ must be identified by agreement. Recalculation  Subject matter Types of Assurance AS TO STRUCTURE  Nature of the assertion  Attestation Engagement ↳ Subject matter information – outcome of the  issues written communication about the reliability of evaluation of the subject matter against a a written assertion  aka. assertion-based engagement es criteria ex. SM: SFP, SCI, SCF; SMI: FS ↳ Responsible party  Characteristics ► Subject matter ↳ Qualitative, objective, historical ► Suitable criteria ➡ SMI ➡ Users ► Affects precision (able to evaluate) and ↳ Practitioner ul persuasiveness of evidence ► Evidence ➡ Report ➡ Users ► Identifiable  Direct Engagement ► Can be subjected to procedures  Responsible party does not present SMI. Practitioner  Evidence [sufficient and appropriate] reports directly with SMI rc Cannot attain objectives if no evidence ↳ Responsible party  Sufficiency (Quantity) ► Subject matter ↳ Greater risk, more evidence ↳ Practitioner ↳ Higher quality of evidence, less required ► Suitable criteria ➡ SMI ➡ Report e  Appropriateness (Quality) ► Evidence ➡ Report ➡ Users ↳ Relevance and reliability LE H ! Merely obtaining more evidence may not compensate of its poor quality  Materiality – professional judgement Non-Assurance Engagements  Agreed-upon procedures  Reports findings  Assurance engagement risk  Users form their own conclusions ↳ ⬆ Assurance ⬇ Risk  Report is restricted to agreed parties SA by ↳ Inherent risk  Compilation ► High volume transactions  Collect, classify, summarize financial information ► Cash transactions  Entails detailed data in manageable form ► Large amounts of estimates  Accountant WILL NOT EXPRESS any assurance ► Complex transaction  Users derive some benefits ► Economy  Tax services (with no conclusion) and tax consulting  Advice on tax and business strategies ↳ Control risk R te  Management consulting and advisory ► IC not designed and operating effectively  Improvement of client’s capabilities and resources ► IC don’t exist for specific assertion ► Testing IC is not efficient ASSURANCE NON-ASSURANCE ↳ Detection Risk FO nu Improve quality or enhance Provide comments or credibility recommendations RoMM Detection Substantive Independent professional Independence not required Testing* Audit, review, examination Agreed-upon, compilation, tax, Inherent Risk (inverse to (prospective) management advisory RoMM) Three-party contract Two-party i Control Risk Output: Opinion Output: Recommendation O M *Confirmation, Footing, Recalculation, Inspection, Tracing, Vouching, Observation International Standard-Setting Boards  Professional skepticism – attitude of questioning mind  International Federation of Accountants (IFAC) ↳ Necessary throughout the engagement  Serves public interest – enhance relevance, reputation, N st ↳ Reduce risk of overlooking suspicious events value of global profession ↳ Evidence [more reliable if:] ↳ International Auditing and Assurance Standards ► Obtained from outside Board (IAASB) ► Generated internally – if IC is effective ► Sets high-quality standards - strengthen public La ► Directly obtained confidence in global profession T ► Written/Documentary form ↳ International Accounting Education Standards ► Original rather than Board (IAESB)  Facsimiles - exact copy ► Shape quality of accountancy educatino  Photocopy - less reliable ↳ International Ethics Standards Board for Accountants (IESBA)  Criteria [benchmarks]  Characteristics [RUN CR] ► Appropriate ethics including independence ↳ Reliability – allows evaluation ↳ International Public Sector Accounting Standards Board (IPSASB) ↳ Understandability – not subject to different interpretation ► Improve public sector financial reporting – use by governments and public sectors ↳ Neutrality – free from bias ↳ Completeness – criteria is sufficiently complete, Philippine Standards [engagement standards] factors are not omitted  Philippine Standards on Auditing (PSAs) ↳ Relevance – assist in decision-making  Philippine Standards on Review Engagements (PSREs)  Philippine Standards on Assurance Engagements (PSAEs)  Conclusions [written assurance reports]  Philippine Standards on Related Services (PSRSs) Unmodified/Unqualified - Present fairly, in all material respect  Philippine Standards on Quality Control (PSQCs) Qualified - Except for ↳ not an engagement standard Adverse - Do not present fairly, in all M respect Disclaimer of Opinion - Don not express a conclusion Practice Statements – interpretive guide and practical assistance to implement related engagement standard.  INTRODUCTION TO FS AUDIT 4. Substantive Testing [Evidence-gathering] ↳ Either analytical procedures or test of details (Bal or Tran)  A systematic process, obtaining and evaluating evidence ↳ Ascertain degree of correspondence between FS and FRF about assertions 5. Completing the Audit  Degree of correspondence – assertion vs. criteria ↳ Conclusions are reached and reviewed, opinions: formed ↳ Assess whether conclusion is consistent with evidences Theoretical Framework for Financial Statement Audit 6. Issuance of Report  Verifiable data ↳ Communicate results to users  Independence of auditor 7. Post-audit responsibilities [Areas for improvement]  No long-term conflict – Auditor and Management ↳ Evaluate the quality of services by the engagement team  Effective IC ➡ more reliable FS  Consistent application of acctg policies ➡ more reliable FS PRELIMINARY ENGAGEMENT ACTIVITIES  Public benefit Accept a new engagement or continue a recurring engagement. Demand for FS Audit  Business and Information risk Considerations  Conflict of interest – responsible party and intended users  Auditor’s competence, capabilities, time and resources es  Expertise  Auditor’s independence  Remoteness of users ↳ Independence in mind – expressing conclusion  Financial consequence without compromising influence  Regulation ↳ Independence in appearance – avoidance of facts that will lead an informed party to conclude that ul SEC Requirements the integrity of the firm or entity is compromised Stock and non-stock TA and TL = P 600,000 or more  Evaluate auditability Branch – stock foreign corp Assigned capital = P 1M or more ↳ Client’s information should be available to auditor Branch – non stock foreign ↳ Absence of documents raises significant doubt TA = P 1M or more rc corporation  Client management’s integrity ROHQs – foreign corp. Total Revenues = P 1M or more ↳ Communication with the predecessor auditor ► Reasons for change in auditor BIR Requirements ► Audit committee prior communications (fraud, etc.) e Persons, Partnerships, Gross annual sales, receipts = ► Integrity of the management Corporations P 3M or more [aka. if vatable] ► Disagreements LE H Assertions Transaction and Account Balances Presentation and * should seek permission from the client and document the matters. Auditor may decline the engagement if denied. Events [IS] [BS] Disclosures [Notes] Accepting the Engagement  Audit Pre-conditions SA by TOCCAC ACERV PORCACUV ↳ Agreements with the management/TCwG Completeness Completeness Occurrence ► Use of applicable financial reporting framework Occurrence Existence Rights & Obligations ► Internal controls are free from error Classification Rights & Obligations Completeness ► Provide auditor with Accuracy Valuation and Accuracy  Access to all relevant information Cutoff allocation Classification  Additional requested information Understandability  Unrestricted access to persons within the entity R te Valuation *DO NOT ACCEPT a limited engagement as an audit engagement if the management imposes a limitation that will Inherent Limitations result into disclaiming an opinion, unless required by law.  Selective testing [sampling risk] FO nu  Use of judgement [non-sampling risk]  Agreement to Terms  Limitations on internal control ↳ Engagement Letter - Written agreement in the best  Cost-benefit consideration interest for both parties to avoid misunderstandings  Management override ► Objectives and scope  Collusion ► Responsibilities of auditor and management  Human errors [control risk] i  Evidence is persuasive [rather than conclusive] ► Identification of applicable framework O M  Characteristics of subject matter [inherent risks] ► Reference to forms and contents *NO NEED to record the terms if the law already prescribes in Audit Procedures [TRIFECTA - IOI] – performed throughout sufficient and detailed, unless the management accepts.  Inquiry – inside or outside the entity  Observation – looking at process performed by others Recurring Audits – new engagement letter not required  Considerations for the need of a new engagement letter: N st  Inspection – examining records, documents, tangibles Plus: Analytical procedures – investigation of fluctuations ↳ Misunderstandings in audit objectives and scope ↳ Revision of special terms Financial Statements/Accounting Records ↳ Change in BOD or management ownership, nature or size, La legal requirements, FRF, other reporting requirements T RACING ↳ Appointment, legal requirements, degree of ownership, Completeness Existence/Occurence separate report, degree of independence Understatement Overstatement Liabilities, Expenses Assets, Income Acceptance of a Change in Engagement  Accept only if there is reasonable justification OUCHING ↳ REASONABLE: Supporting Documents/Invoices ► Change in circumstance the requires the need ► Misunderstandings to the nature of original audit OVERVIEW OF THE AUDIT PROCESS ↳ NOT REASONABLE: ► Restriction of scope, unable to obtain evidence Audit Process ► Relates to incorrect, incomplete information 1. Preliminary Engagement Activities ↳ accept new client or continue an existing *If the auditor disagreed with the change, and is not permitted ↳ minimize the likelihood of associating with a client whose by the management to continue the original audit, the auditor: management lacks integrity ↳ Shall withdraw where possible under laws/regulations 2. Planning an Audit ↳ See if there is any obligation to report the circumstance. ↳ Obtaining more knowledge about the client ↳ Assess different risk to determine NTE for FAP Is there a reasonable justification? 3. Study and Evaluation of Internal Control  YES: stop performing and referring to the old engagement, ↳ RAP: Design and implementation except agreed-upon procedures are involved. Start new ↳ ToC: Operating effectiveness  NO: Continue the original. If prohibited, withdraw. It is ↳ Basis of reliance on IC necessary to communicate it to appropriate party.  PLANNING AN AUDIT Inherent Limitations: [COCCHA]  Cost-benefit consideration – cost must not exceed benefits PSA 300: The auditor plans the audit so that it will be  Override of the management – abuse of control responsibility performed in an effective manner.  Collusion – circumvention of controls with in/outside parties  Change in conditions – procedures may become inadequate Benefits of Planning  Human error – carelessness, distraction, judgement mistakes  Coordination of work done  Anticipated transactions – addresses ONLY routinary or usual  Assignment of work allocations  Facilitating the direction and supervision, and review of work Corporate Governance – system of stewardship and control  Helping the auditor for Effective and efficient audit ↳ Guides the conduct of people and the organization itself to:  Problems are identified and resolved in a timely basis ► Fulfill long-term economic success, moral, legal, social obli  Attention to important (risky) areas of the audit ► Maximize success and create sustainable value to shrhldrs Factors Affecting the Nature and Extent of Audit Plan Roles and Responsibilities Less Extensive More Extensive  BOD [TCwG] – exercise corporate powers, oversight policies Size Small entity Large entity  Management – execution of daily risks operations Simple transactions Involves judgement Complexity Components of Internal Control [CRIME] (ex. depreciation) and estimates es Experience Recurring audits New/Initial audits  Indirect Controls – pervasive; FS Level of risk [FSL] Circumstances Little or no changes Significant changes ↳ Control Environment Timing After year-end Before year-end ► internal culture, attitude and awareness to IC ► overall foundation – influences control consciousness ul Planning phase: Pre-engagement, Assessment of Risk, Risk Response, Conclusion ► Elements: [IM CPA HO] Previous Audit Current Audit  Integrity, Management style, Competent individuals, P A R C P A R C Participation of TCwG, Assignment of authority, HR policies & procedures, Organizational structure rc Outputs of Audit Planning  Overall Audit Strategy – Scope, Timing, Extent ↳ Risk Assessment [I AM]  Detailed Audit Plan – NTE of RAP and FAP ► Identify business risks (only those relevant to FS)  Audit Program – Detailed audit procedures ► Assess significance and likelihood of risks e *The audit program executes the overall audit strategy/plan ► Manage those risks *Should be updated and changed throughout, as necessary. *auditor is not responsible to identify ALL business LE H risks. Business risk is broader than RoMMs Identifying and Assessing RoMMs  Financial Statement Level – risks relate pervasively to the ↳ Monitoring of Internal Control System financial statements as a whole and potentially affect ► Assessing the quality of IC performance over time. many assertions ► Assessing design and operations, timely-corrective acts.  Determine if FS level risks affects assertion level risks SA by  Ongoing: [daily transactions] by same line functions ↳ Evaluate the nature and extent of pervasiveness  Separate: [periodic] done by internal/external auditors  Assertion Level – risks affect only certain assertions toward  Direct Controls – precise, supported by indirect controls, [AL] account balances, classes of transactions, and disclosures ↳ Information and Communication System [PIISO]  Determine risks in assertions [Significant, high, low risk] ► How entity initiates, records, processes its transactions ↳ Plan test of controls? ► People, Input/Data, Infrastructure, Software, Output ► YES – Assess control risks [Internal control topic] R te ► NO – then RoMM is equal to inherent risk because ↳ Control Activities – mitigate risks, preventive and detective control risk is assessed at maximum level ► Includes information processing and general IT controls ► Control activities: [PRAVS] Materiality and Procedures FO nu  Physical/Logical Controls – asset security/access MATERIALITY AUDIT RISK AUDIT PROCEDURES  Reconciliation – comparing data, identify differences Low High More extensive  Authorization and Approval – for valid transactions High Low Less extensive  Verification – follow up action in did not match in policy *Materiality vs. audit risk and procedures ➡ INVERSE  Segregation of Duties [ICARE]; [CAR – minimum] *Audit risk and audit procedures ➡ DIRECT ↳ Independent checks or internal audit, Custody of i assets, Authorization, Recording, Execution O M Inherent Risk and Control Risk *when understanding controls – the auditor should focus on Control Risk design and implementation, not on effectiveness. Inherent Risk HIGH MEDIUM LOW HIGH Lowest Lower Medium Areas of Control MEDIUM Lower Medium Higher Administrative Control Accounting Control N st LOW Medium Higher Highest ↳ Authorizations of transactions ↳ Safeguarding of assets CONSERVATIVE: IR and CR are at high levels, so then the ↳ For operational efficiency ↳ Reliability of financial records DR is at lowest to maintain acceptable level of audit risk. ↳ Adhere to managerial policies ↳ Internal audits La Detection Risk, Audit Procedures and Materiality Implementation of Control T LOWER DR HIGHER DR Entity-wide controls Transaction controls Nature More effective Less effective ↳ Control ineffectiveness may ↳ Operates only at certain level Timing Closer to year-end Interim or several dates have pervasive effects or department. May not have Extent Larger sample size Smaller sample size across the whole entity pervasive effect as a whole Materiality Lower materiality Higher materiality ↳ Management override, RAP, ↳ Periodic inventory counts, Materiality and DR: DIRECT Monitoring of operations, risk bank recon, three-way management policies match, customer contracts Materiality, Risk and Audit Procedures Audit/Substantive Procedures Internal Control Procedure RoMM [Inherent & control risk] DIRECT Evaluate Design and Implementation of Controls Detection risk Inverse Materiality Inverse Preliminary Assessment of Control Risk [CR] CR IS HIGH CR IS LESS THAN HIGH INTERNAL CONTROL Perform Test of Controls [ToC]  Design & Implementation – varies on entity size, complexity Operating effectively?  A process established by management – staff will comply. NO YES  Has DIRECT relationship with objectives. CR at MAX Level CR at MAX Level CR below MAX Level  An effective IC reduces possibility of error and fraud. Then perform substantive testing  An effective IC produces reliable evidence, leading to less High CR: IC is not effective, evaluation is not efficient, rely extensive FAP. Thus, improves audit EFFICIENCY without heavily on substantive testing. “No reliance approach” compromising audit EFFECTIVENESS. Less than high CR: Plan to perform ToC “Reliance approach”  Test of Control – evaluate operating effectiveness in Test of Details preventing, detecting, correcting MMs at assertion level  Test of Transactions [Income statement accounts] ↳ Substantive procedures alone cannot provide sufficient ↳ Focus on movements to particular account balance appropriate evidence at assertion level ↳ More effective than ToB as ToT examine more details ↳ Procedures: [IOI] + Reperformance ↳ Impractical to account with voluminous transactions ► Inquiry alone is not sufficient ↳ Small volumes (konti lang), relatively material amounts ► Inquiry + inspection or reperformance = more assurance ► PPE, Intangibles, Bonds Payable, Shareholders’ Equity than inquiry + observation ↳ ToC for recurring audit: inquiry + observation / inspection  Test of Balance [Balance sheet accounts] ► If there are changes: test the controls in current audit ↳ Focus on ending balances of accounts ► If no changes: test SOME controls once in every 3rd audit ↳ Large volumes, relatively immaterial amounts ► Cash, AR, AP, Inventories Evidence provided [based on volume of transactions] TOC + Substantive Analytics Substantive Testing Detection Risk, Audit Procedures and Materiality HIGH volume MORE Persuasive Less Persuasive LOWER DR HIGHER DR LOW volume Less Persuasive MORE Persuasive Nature More effective Less effective Timing Closer to year-end Interim or several dates es Reassessment of Control Risk Extent Larger sample size Smaller sample size Remains less than HIGH Changed to HIGH Materiality Lower materiality Higher materiality Rely on ToC Do not rely on ToC *nature – quality of evidence to obtain; extent – quantity Effect ↳ Less effective procedures ↳ More effective procedures *NTE (Audit Procedures) – cause; DR - effect on ↳ Interim testing ↳ Near or at year-end ul ST ↳ Smaller sample size ↳ Larger sample size Specific Procedures  Trifecta [Inquiry, Observation, Inspection]  Recalculation, Analytical Procedures, and: Documentation [no particular form required]  Confirmation: rc  Flowcharts: graphical, better understand business process, ↳ External: Direct written, from third party [hard or soft copy] save time on identifying risks, deficiency, inefficiency. POSITIVE CONFIRMATION NEGATIVE CONFIRMATION Enhance supervisory review, provide methods of recording Response  Narrative Descriptions: supplement to flowcharts, not ↳ Agree or disagree, expects ↳ confirming party responds only if e effective tool for process description. Lengthy, difficult to response and exceptions they disagree review, not user-friendly. ↳ “Please kindly confirm the ↳ “If you agree, no reply is  Internal Control Questionnaires: carefully structured, LE H amount given below” needed. Provide if u disagree” logically sequenced. Highlights control gaps, strengths and Availability weaknesses. Easy to understand, simplify control evaluation. ↳ Necessary when evidence is ↳ Within and outside the entity only available outside *Basis of CR assessment – not required if CR is HIGH [Max] Risk of Material Misstatement SA by ↳ Entity's AIS, IC are unreliable ↳ Normally used if RoMMs is low SUBSTANTIVE TESTING ↳ Management override prevents ↳ Expects few or no exceptions evidence from IC EVIDENCE Characteristics of Items  Without it, auditor may not be able to express an opinion ↳ Small number of large account↳ Large number (madami) of small  Persuasive rather than conclusive because of: balances homogenous accounts ↳ The need to complete the audit [time and cost] R te ↳ Nature of evidence [not perfectly reliable] Others  Source – naturally cumulative (obtained during the audit) ↳ More effective as negative ↳ Auditor has no reason to believe  Cost-benefit and Difficulty – cost vs. usefulness. But approach rarely provides that recipients will disregard the difficulty and expense in not a basis to omit a procedure explicit evidence in case of non- confirmation FO nu there is no other alternative of obtaining evidence. response *the management should prepare and sign the request. CLASSIFICATIONS *the auditor determines what, where, whom to request, ↳ Accounting data – support or contradict assertions design of the request, send, follow-up, and receive response. ► Accounting entries, checks, invoices, contracts, etc. i ↳ Corroborating Information – others Management refusal to allow the auditor ► Obtained during audit, minutes, confirmations, etc.  Is the refusal reasonable? O M *accounting data – not sufficient, shall also obtain other data. ↳ YES – are there alternative procedure? ► YES – Do it PERSUASIVENESS – “sufficient and appropriate evidence” ► NO – Assess possible effects on auditor’s opinion* ↳ Sufficiency [Quantity] ↳ NO - Assess possible effects on auditor’s opinion* ► Affected by RoMMs [IR,CR], and quality of evidence N st *scope of limitation – modify opinion – qualified or disclaimer ↳ Appropriateness [Quality] ► Relevance – if it relates to assertion [Tracing-Vouching] Substantive Analytical Procedures  Affects COMPLETENESS and ACCURACY. Examples: “Analytical procedures” ↳ Inspection of collection of receivables - Existence, La  Analysis of plausible relationships T valuation, but not cut-off  FINANCIAL and NON-FINANCIAL data ↳ Physical examination of tangible assets - Existence,  Investigation – identified fluctuations or relationships condition, but not rights & obligations ↳ inconsistent with expected values ↳ Testing documents – ↳ significant amounts  Existence - Confirmation of AR, cut-off test of credit sales after year-end ↳ Planning phase - Required  Valuation – Inquiry for pledged AR, credit risks, ↳ Substantive testing phase - NOT REQUIRED labor/overhead rates for inventories ↳ Overall review phase - Required  Completeness - Credit approval, audit of payables, cut-off test of purchases before year-end  Used in Substantive Testing – obtain relevant and reliable ► Reliability – if it is dependable to the state of assertion ↳ Determine suitability of procedures to assertions  Influenced by SOURCE and NATURE ↳ Develop estimates/expectations ↳ Evaluate reliability of data ~ Concepts of evidence can be found: FUNDAMENTALS OF AUDITING [3SECC] ~ ↳ Aggregate the misstatements to check if material ↳ Determine differences from recorded items vs. expectations PERFORMANCE ► If there are significant fluctuations/inconsistencies:  Designed to detect material misstatements – assertion level  Investigate: Inquire to management for appropriate  Types: evidence or perform other procedures. ↳ Test of Details – primary response to RoMMs ↳ Substantive Analytics – optional [less effective]  Used in Overall Review – overall conclusion - consistency ► As to which – matter of judgement after risk  Corroborate conclusions formed during audit assessment and audit planning  Draw reasonable conclusions to base the auditor’s opinion  COMPLETING THE AUDIT  1Going concern: appropriate: are required disclosures made? ↳ YES - UNQUALIFIED with EoM – material uncertainty Wrap-up Procedures ↳ NO - Qualified or Adverse 1. Identify liabilities not given appropriate treatment ↳ Multiple material uncertainties – Disclaimer of Opinion  Search for unrecorded liabilities - Greater concern with COMPLETENESS. Companies tend to understate liabilities.  2Going concern: not appropriate: FS prepared alternatively? ► Review subsequent cash disbursements [after year-end] ↳ YES – UNQUALIFIED with Emphasis on Other Matter prgrph ↳ Liabilities exist at year-end but not recognized ↳ NO – Adverse ↳ Obtain disbursement list, evaluate PO-RR-VI (3-way) ↳ Subsequent period is a professional judgement  Subsequent events ↳ Evaluate if liability is properly included/excluded ► Accounting purpose – adjusting/non-adjusting ► Unapproved invoices or open purchase orders [POs] ► Auditing purpose – events/facts ↳ (same as review of subsequent payments) ↳ Obtain unprocessed invoices or open POs, PO-RR-VI EVENTS FACTS ► Analytical procedures Date of FS FS Approval Auditor’s FS and Auditor’s for Issuance Report Date Report Issuance (latest period ↳ Formulate expected payable balances based on historical coverage) ↳ Use current year changes in purchases, payments, credits es Adjusting Non-adjusting  Litigations and claims – required material disclosures ► Inquiry – in-house legal counsel (within the entity) ► Review of minutes of the meetings with TCwG [BoD] ► Auditor’s Responsibilities ► Examine legal expense accounts ↳ EVENTS  Gather sufficient and appropriate evidence that all ► Direct inquiry to external legal counsel - INQUIRY ul events up to date of auditor’s report that may ↳ Use of letter of inquiry require adjustment and disclosures are identified.  General – if aware of cost/financial implications  Obtain written representation from the management  Specific – if unlikely to respond  Read minutes of the meetings after FS date rc ↳ Meet to discuss significant risks and disagreements  Read latest subsequent interim financial statements ↳ FACTS – GR: NO RESPONSIBILITY Conclusions and Reporting XPN: relevant to the financial statements and auditor’s report  Management - refused to allow auditor to Qualified or e communicate with entity’s external legal counsel Disclaimer Conclusions and Reporting  Entity’s legal counsel – no appropriate response  FACTS existed as of auditor’s report date? LE H ↳ YES – discuss with management and TCwG 2. Addressing required disclosures [using disclosure checklist]  Consider if FS needs amendment  Related parties – control or significant influence  Inquire how management intends to address matters ► Auditor awareness of existence and transactions of RPs ↳ NO – auditor has no further obligation ↳ GAAP disclosure requirements ↳ Source of audit evidence – assessment of reliability SA by If the management AMENDS the financial statements: ► Unusual transactions, unidentified related parties may ► Before FS issuance exist ↳ Carry out necessary audit procedures ↳ Abnormal terms of trade [unusual prices, interest rates] ↳ Issue new auditor’s report ↳ Not logical business reasons/transaction – OCCURENCE ► After FS issuance (same with before, but has to:) ↳ Difference between substance vs. form ↳ Review steps taken by the management to inform anyone ↳ High volume/significant transactions compared w/ others who received the FS and auditor’s report R te ► Audit procedures [Substantive testing] – OCCURRENCE ↳ Bank confirmation of liabilities – guarantor relationships Management is UNWILLING to AMEND: ↳ Review of investments – equity interests, joint venture ► Before FS issuance: Auditor’s report is: [to Mgt and TCwG] ↳ Review of accounting records – large/unusual transaction ↳ Not yet issued - Qualified or Adverse [benggahin mo na] FO nu ► Audit procedures – COMPLETENESS ↳ Already issued – notify Mgt and TCwG not to issue ↳ Review – prior working papers – names of known RPs If issued otherwise: seek legal advice to prevent reliance ↳ Review of minutes, tax returns, predecessor audit inquiry ► After FS issuance - notify the management and TCwG of the ↳ Inquiry – affiliation of directors and officers auditor’s intent to seek legal advice - prevent reliance on FS ↳ Shareholder records – names, listing of share register If mgt and TCwG does not take actions, seek legal advice i Conclusions and Reporting Discovery of Omitted Procedures: O M  Unable to obtain evidence Qualified or Disclaimer Assess the importance/relevance to FS or Auditor’s Report  Inadequate disclosure Qualified or Adverse  Auditor’s opinion compromised?  Transactions not properly accounted for Qualified or Adverse ↳ YES – perform the omitted procedure or the alternative  Consult legal counsel if client does not allow  Going concern ↳ NO – edi wow N st ► Management responsibilities ↳ Specific assessments –going concern ability atleast 12mos Analytical Procedures ↳ Disclose all material uncertainties as going concern Pupose Level Required? Risk assessment - Preliminary Obtain understanding FS level Yes ► Auditor’s Responsibilities La Risk Response - ToC or ToD/ST Detect MMs Assertion NO T ↳ Consider management’s assessment of going concern Conclusion - Reporting Conclude on FS FS level Yes ↳ Inquire for material disclosures about going concern  Additional procedures if conditions are identified: Concluding Analytics i. Obtain and review management representation of  Recorded amounts vs. Auditor’s expectations plans for future actions  If there are significant differences, investigate further by ii. Gather evidence to confirm or dispel (doubt) the ↳ Inquiry with the management existence of material uncertainties ↳ Do necessary procedures (review of audit procedures) Conclusions and Reporting Use of Work of Experts  Did management made proper assessment?  Auditor should assess his professional competence and ↳ YES – Evaluate the assessment the appropriateness of his work ↳ NO – Request to assess, if not: Qualified or Disclaimer  The specialist should have understanding of auditor’s use  Client should have understanding on expert’s nature of work  Any events to cast significant doubt to going concern? ↳ YES – Evaluate if it represents material uncertainty The auditor may refer the auditor’s report from the specialist: ↳ YES – evaluate if management has mitigating plans  For adding explanatory paragraphs to an unqualified opinion ↳ YES - Going concern is appropriate1: DISCLOSE!  Even the expert is related to the entity ↳ NO - Going concern is NOT appropriate2  Becomes aware of conditions causing substantial doubts ↳ NONE - UNQUALIFIED :) regarding entity’s going concern The auditor may identify the specialist:  If the findings result to an adverse opinion ↳ NONE – Going concern is appropriate: UNQUALIFIED :)  COMMUNICATION AND DOCUMENTATION AUDIT REPORTING Management Representation Letter (Written Representation) GENERAL PURPOSE REPORTING  Used to confirm certain matters  Supports other audit evidence Standard Auditor’s Report [TAOB MA SAD]  A source of evidence, but not as  Title – “Report of an Independent Auditor” – distinguishes  A substitute for other audit procedures the report from other reports  Sole source of evidence (it is like an inquiry)  Addressee – should not be addressed to a specific officer  Issues may exist if not provided ↳ Corporations – Shareholders, TCwG or intended users ↳ Partnerships – Either partnership or both with partners SOURCE: ↳ Unincorporated Joint Venture – Participant or venturers ↳ Chief Executive Officer and Chief Financing Officer ↳ Sole Proprietorship – proprietor ↳ Owner, or the manager for small entities ↳ Third-party – engaging party [investor, creditor, court] ↳ Those charged with governance, if appropriate  Opinion – refer to notes including summaries  Basis of Opinion – Auditor’s Responsibility paragraph WHEN IS IT PROVIDED? ↳ States - the audit was conducted in accordance with PSA ↳ As near as practicable, but not after auditor’s report  Management & TCwG Responsibilities to Financial Statement es ↳ Done normally same date as the auditor’s report ↳ Preparation and presentation of financial statements ↳ Internal controls TYPES OF WRITTEN REPRESENTATION: ↳ Assessing and disclosures of going concern matters GENERAL* SPECIFIC  Auditor’s Responsibilities for the Audit [MEAL CO] What for? ↳ Preparation of FS ↳ On auditors request on  May be presented within the body of auditor’s report; ul ↳ Recognition, specific items  Within the appendix to the auditor’s report; or measurement, and  Reference to a website containing the responsibilities disclosures ↳ Materiality; Exercise of professional judgement and ↳ Subsequent events skepticism; Audit process and procedures, Level of rc ↳ Completeness of assurance; Causes of misstatements (fraud or error); information provided to Overall objectives of the auditor auditors  Signature and Name of the Auditor When to ↳ In all audits (required) ↳ Only when PSA requires ↳ If does not intend to include his name, discuss to TCwG e obtain? ↳ When necessary to to inform the likelihood and severance of personal support other evidence security threat obtained? LE H If not ↳ Disclaimer of Opinion ↳ Qualified or Disclaimer *General written representation: a management responsibility  Address of the Auditor – jurisdiction where he practice  Date of Auditor’s Report – on or after obtaining evidence Determining the Types of Opinion Management Representation vs. Management Letter UNQUALIFIED QUALIFIED ADVERSE DISCLAIMER SA by Written Representation Management Letter “Presented fairly Prepared “Does not “We do not By appropriate level [CEO,CFO] By the auditor in all material and signed presented fairly express an respects” “Except for...” To whom? Auditor Management in all material opinion or “Give a true and Required? YES No respects” conclusion” fair view....” When? Same with the auditor’s report As timely as practicable  Fairly presented  Material  Disclosures  Describe the Confirmation of matters Internal control issues in accordance to limitation in ↳ Quantitative scope Content Support to other audit evidence Recommendations for R te reporting scope ↳ Qualitative  No reference Management responsibilities improvement framework  Material  Nondisclosure to Auditor’s To remind the management for Encourage better non- Responsibility Importance ↳ Discuss with its primary responsibility for FS auditor-client relationship compliance  No statement TCwG the Audit evidence only when it is Other suggestions (tax, to framework that evidence Other use omitted the only evidence available management services) FO nu procedures has been ↳ Include if obtained Audit Documentation [Working Papers] prohibited by  No KAMs ↳ Record of the basis of conclusions law/regulation  No other infos ↳ Evidence that audit was planned and performed under PSA ↳ Less accurate if done after the audit work is performed Modifications i ↳ May be used as reference to reconstruct clients accounting Matter Material Material and Pervasive O M records, but not as substitute for entity records  FS is materially misstated (departure Qualified Adverse CONTENTS OF AUDIT DOCUMENTS from framework) to help experienced auditor with no previous connection  Inability to obtain Qualified Disclaimer ↳ Nature, timing, and extent of audit procedures evidence (scope)  Inability due to i. Withdraw* N st ↳ Results of audit procedures, and evidences obtained ↳ Significant matters and conclusions reached imposed limitations ii. Disclaimer if not Qualified ► Selection, application, consistency of accounting principles practicable (may include Other Matter) ► Results of audit procedures – MM, revision of assessments La *Before withdrawing, first consider: ► Difficulties in applying audit procedures T  Requesting the management to remove limitations ► Findings that could result in modification of opinion  If refused, communicate to TCwG and determine alternatives ► Audit adjustments ► How the auditor addressed contradictions/inconsistencies Additional Communications Key Audit Matters [KAM] Emphasis of Matter [EoM] Other Matter [OMP] Departure from PSA Most significant matters A paragraph in the Paragraph in auditor’s ↳ Reasons for departure and alternative procedures performed selected and discussed auditor’s report that report that refers to a ↳ How alternatives achieve the aim of PSA requirement with TCwG refers to a matter matter other than presented and disclosed those presented and “we draw attention to...” disclosed Current Working Papers Permanent Working Papers Key Audit Matters – required for listed entities Copy of financial statements AoI and by-laws Overall audit strategy, audit Copies of minutes, legal docs ↳ Higher/significant RoMMs – requires auditor’s attention plan, audit program, working Copies of communications ↳ High estimation uncertainties trial balance, audit memo, Results of analytical procedures ↳ Effect of significant events or transaction reconciliations, lead schedules from previous years’ audits Emphasis of Matter Paragraph – if matter is not a KAMs ↳ Included if the auditor is not required to modify an opinion  Indexing: lettering, numbering; aids cross-referencing ↳ [GUESTS]: Going concern with material uncertainty;  Cross-indexing/referencing: trail for working paper review Uncertain litigation result; Early application of new standard;  Tickmarks: symbols - describes audit procedures performed Subsequent discoveries; Tragedies; Special purpose FS Other Matter Paragraph – if matter is not a KAMs  Ownership of the auditor ↳ [CRIMiRS]: Comparative information; Restriction on use of  Should be completed within 60 days after auditor’s report report; Inability to withdraw; Material inconsistency;  Retention: PSQC and PSA 230: Atleast 5 yrs; SEC: 10 years Reporting on more than one set of FS; Subsequent discovery  Other Information – financial or non-financial (other than FS GR: Auditor is prohibited from issuing an unmodified and Auditor’s Report) included in entity’s annual report opinion for Single FS or Specific Element of it - if he issues an adverse or disclaimer in the complete set FS. AUDITOR’S RESPONSIBILITIES - Consider and respond to Material Inconsistencies and Material Misstatement of Fact XPN: Not prohibited by law; reports are published MI in Financial Qualified or Adverse – if management refuses separately; elements are not major portion of complete FS Statement to correct the material misstatements MI in Other Qualified – since FS are fairly presented Reporting on Summary Financial Statements information OMP – discuss the material inconsistencies ► Summary FS – historical; derived from Audited FS; less Request the management to consult to a detailed; management uses applied criteria qualified third party – entity’s legal counsel *the auditor of AFS should be also the auditor of SFS. MMs of Facts Audit Report on Summary of FS [TAO WaR MASAD] ↳ Refuses to correct – take further actions, notifying TCwG, then obtain legal advice  Title – “Report of an Independent Auditor”  Addressee – evaluate appropriateness if the addressee of AUDITOR’S RESPONSIBILITIES - On Comparative Information the SFS is not the same as the AFS Example: Statement of Financial Position as of 2024 and 2025  Opinion – is SFS consistent with the AFS? YES – Unqualified opinion NO – Adverse Comparative Statement  Warning – “SFS do not contain all disclosures as in the AFS” es Minimum Requirement for Presenting Comparative Statement ↳ “SFS is not a substitute for reading AFS and Audit Report” PRFS – 2 years - complete set of FS [SFP, SCI, SCF, SCE]  Reference to Audit Report SRC 68 – 2 years – SFP ↳ State that AFS includes the following opinions: 3 years – SCI, SCF, SCE ↳ Basis for qualified opinion ul ↳ Matters referred to in the EoM, OMP, MUrGC, KAMs Corresponding Figures “Current figures” - AR for 2025 only ↳ Disclose uncorrected MMs in the other information Corresponding Current Type of  Management Responsibilities Reference to Corresponding 2024 2025 Opinion  Auditor’s Responsibilities – whether SFS are consistent in all rc Fairly stated Fairly stated Unqualified No reference material respects with [or in fair summary] the AFS Misstated Corrected Unqualified No reference  Signature Qualified Reference 2024 since it was the  Address of the Auditor Misstated Unresolved or adverse cause of misstatements  Date of Auditor’s Report Fairly stated May include an OMP that 2024 e (Audited by Fairly stated Unqualified (corresponding figures) are audited predecessor) by predecessor Examination of Prospective Financial Information LE H May include an OMP that 2024 is Forecast Projection Unaudited Fairly stated Unqualified unaudited ► Based on historical conditions► Based on range of possible Unaudited ? See initial Include an OMP to inform users and actions conditions and actions discussions ► Best-estimate assumptions ► Hypothetical assumptions ► What management expects to ► What may happen depending Comparative Figures – Auditor’s Opinion for both years happen on range of possible SA by Prior Period Current Type of scenarios (sensitivity, what What to report 2024 2025 Opinion if analysis) Fairly stated Fairly stated Unqualified No reference from prior year ► If assumptions are reasonable ► If assumptions are consistent Qualified / Opinion B OMP - Disclose the substantive Opinion A Adverse / (different) reasons for difference in opinion  Engagement - consider the intended use; nature of Disclaimer Is the predecessor’s opinion assumption; elements; period covered Fairly stated R te reissued? ↳ Do not accept; or should withdraw if: (Audited by Fairly stated Unqualified YES – no reference from prior year ► Assumptions are clearly unrealistic predecessor) NO – Refer from 2024 with an OMP ► Auditor believes PFI will be inappropriate for its use - Successor should communicate  Evidence – speculative in nature; future-oriented the misstatement to the FO nu management and TCwG  Level of Assurance – moderate level only Fairly stated Misstated Qualified ↳ Auditor is not in position to express whether results - Do not refer from 2024 if the (Predecessor) (Successor) or Adverse predecessor agrees to issue a new shown in PFI will be achieved auditor’s report for 2024. Report ↳ May express positive assurance if appropriate level of only for 2025 (current). satisfaction is obtained i SPECIAL PURPOSE ENGAGEMENTS OTHER RELATED SERVICES O M For the needs of specific users: AUDIT AUDIT-RELATED SERVICES  Tax Authorities – tax basis  Creditors – cash receipts and disbursement basis AUDIT REVIEW AGREED-UPON COMPILATION  Regulators – based on regulations High assurance Limited No assurance No assurance  Contracting parties – bond indenture, loan agreements but not absolute (Moderate) N st Independent Review Report on Findings Compilation Required Acknowledgements: to achieve fair presentation Auditor’s Report Report of Procedures Report Fair Presentation Framework Compliance Framework Review of Financial Statements La Supplementary Disclosures Requires strict compliance with  Performed through inquiry and analytical procedures T To provide disclosures beyond framework requirements  Extent is substantially less than an audit those specifically required (explicitly or implicitly) Agreed-Upon Procedures Departure from Framework No required acknowledgements  Carry-out predetermined procedures and test Only in extremely rare cases for disclosures or departure  Save time, cost, effort of entity, instead of doing it themselves (explicitly)  The effectiveness of this engagement depends on entity’s capacity to identity key areas or matters An opinion may be expressed only on:  Auditors are not required to be independent ► For Single FS – SFP, SCI, SCIE, SCF, Notes [Summary of  Restricted to the parties who agreed with the procedures to significant accounting policies and other explanatories] be performed ► For Specific element – Schedule of receivables, external assets, net tangible assets, disbursements, inventories Compilation of Financial Statements  Practitioner applies accounting and financial expertise to Auditing both the Complete Set and Single FS/Element assist the management in preparing and presenting - The auditor shall express a separate opinion for each financial information in accordance to reporting framework - Auditor’s report should include [KEMO MU]:  Practitioners do not express an opinion or review conclusion  Key Audit Matters  Practitioner acts as the preparer of subject matter  Emphasis of Other Matters paragraph  Not required to verify the accuracy or completeness of the  Modified opinion, information provided by the management  Other Matters paragraph  The report is not a vehicle to express an opinion in any form  Material uncertainties regarding going concern  Uncorrected material misstatements of other information  THE ACCOUNTANCY PROFESSION Issuance  COR – lifetime until withdrawn, suspended or revoked RA 9298 - Philippine Accountancy Act of 2004  ID - Renewable every three (3) years Objectives: ↳ Standardization and regulation of accounting education Special or Temporary Permit ↳ The examination for registration of CPAs May be issued by BOA subject to approval of PRC, and payment of fees to the following: FOREIGN CPA ↳ The supervision, control, and regulation of the practice of  Consultation, professor, lecturer [teaching only] essential to accountancy in the Philippines accountancy education in the Philippines  Internationally recognized expert or with specialization for the Enforcement: advancement of accountancy in the Philippines ↳ Professional Regulation Commission & Board of Accountancy Death, Withdrawal or Resignation of a Partner ► Primary duty for enforcing and implementing provisions  Surviving partner may continue to practice under the ↳ Other law enforcement agencies partnership name for the period of not more than two ► Assistance in enforcing the provisions of RA 9298 (2) years. Shall change the name to an individual CPA ↳ Secretary of Justice or new name of firm ► Legal adviser to PRC and BOA Certificate of Accreditation – Public practice es Major Areas or Accountancy  Should have 3 meaningful years in any areas ↳ Auditing ↳ Management Consultancy ↳ Significant involvement ↳ Taxation ↳ General Accounting ↳ Atleast 1 year as audit assistant and atleast 2 years auditor in charge Scope of Practice  Valid atleast 1-3 years untill birth month/SEC registration ul  Public Practice  Renewal ↳ Independent professional services to clients on a fee basis ↳ Filed within 3 years after expiry – reckoned from the ↳ Representing clients before government agencies approval until birth month/SEC registration ↳ Client-service provider relationship ↳ Filed more than 3 years after expiry – deemed as rc  Commerce and Industry initial application ↳ Involve in decision-making (accounting) ↳ Representing employer before government agencies RA 10912 - Continuing Professional Development Act of 2016 ↳ Paid-up capital > P5,000,000.00 and/or e Revenues > P10,000,000.00 CPD: Atleast 120 CPD units → Accreditation  Government Accounting LE H min 20 units a year ↳ Accounting professional group in government or GOCCs 15 CPD units → Renewal of license ↳ Coordinating with COA (or representing COA in ↳ Excess units cannot be ↓ government audits) carried over for next 3 XPN: 65 years old  Education / Academe periods. not required ↳ Teaching of accounting, auditing, MAS, finance, business ↳ XPN: Masteral, Doctoral SA by law, taxation, and other technically related subjects ↳ BSA Program – dean/department chair/program chair Minimum units under competency areas: must be a CPA ↳ Technical Competence 30 ↳ Members of IBP (lawyers) may teach business law and ↳ Professional skills 5 taxation subjects ↳ Professional values, ethics, attitude 5 ↳ Flexible (any of the three) 80 R te Professional Regulatory Board of Accountancy Composition Organizations  Chairman + 6 members  FRSC: [includes BIR]  Vice-chairman with term of 1 year ↳ RA 9298: Chairman + 14 members  Four sectors in the practice of accountancy shall as ↳ BOA: Adds Insurance Commission (Chairman + 15) FO nu much as possible be equitably represented  AASC: [no BIR included] ↳ RA 9298: Chairman + 14 members Appointment ↳ BOA: Chairman + 17 members  APO/PICPA (5 nominees) – not later than 60 days ► Includes additional from small and medium sized  PRC (3 recommendations to the president) practitioners. Adds Insurance Commission i  President (1 appointee as the chairman)  Educational Technical Council: Chairman + 6 members O M  Quality Review Committee: Chairman + 6 members Qualifications of Members  CPD Council: Chairman + 2 members  Natural-born citizen and resident of the Philippines  10 years work experience in any scope of practice FRAUD, ERROR AND NOCLAR  Good moral character  Must not have any pecuniary interest in any school, N st FRAUD ERROR college, or review centers Fraudulent financial Misappropriation of Unintentional  Must not be a director or officer of PICPA statement reporting assets To deceive FS users To conceal assets without ex. rounding, Term of Office La authorization transposition, etc.  3 years, renewable for another T Management override Theft of assets Mistake  1 year cool off period after 2 successive years of term  Filling unexpired term ≠ complete term Impact on Audit Procedures  Must not exceed 12 years NATURE More extensive Less extensive TIMING Close to year-end Interim Suspension and Removal: by the President through PRC EXTENT More samples and procedures Less  Neglect of duty or incompetence  Violation or toleration of violation – RA 9298, IRR, etc. Other Types of Fraud  Final judgement of crimes involving moral torpitudes  Management Fraud – commonly associated with FS fraud.  Manipulation or rigging of CPALE ↳ Can involve employees. Has GREATER RISK  Employee Fraud – commonly associated with MoA. CPALE Rating ↳ Can involve management – more able to disguise fraud. A SUBJECT BELOW 65%? ↳ Unlikely to detect if through collusion [nagtulungan eh] YES NO Fraud Risk Factors [Fraud Triangle]  Incentive and Pressure Gen Ave. atleast 75%? ↳ incentive/pressure to commit fraud from top management ↳ pressure of meeting loan covenants NO YES  Opportunity Majority (4 subjects) atleast 75%? ↳ Absence of control/weak controls, nature of transactions YES NO ↳ Management experience and competency, history of fraud CONDITIONAL FAILED PASSED  Rationalization/Attitude ↳ Culture, character, ethical values, governance  Responsibilities to Fraud Categories of Business Processes  Management and TCwG – prevention and detection  OPERATING: core activities, voluminous recurring intervals ↳ Prevention – reduce fraud opportunities 1. Revenue and Receipt Process ↳ Deterrence – persuade not to commit fraud (punishment) ↳ ORDER TO CASH [Sales and Collection]  Auditor – basic responsibilities a) Customer – send purchase order [external file] ↳ Identify and assess RoMMs due to fraud b) Sales Department – SALES PROCESS STARTS ↳ Obtain evidence thru design and implementing response ► Locate, negotiate, accept orders from customers ↳ Response to identified or suspected fraud ► Prepares sales order [an internal file], forward copies ► Report to appropriate level of management as soon as to customers, credit, shipping, billing, then retain possible, even minor fraud or irregularities copies. ► Report to TCwG either writing or orally ► Monitor and update status of order. ↳ When management is involved in fraud  Has exclusive communication with customers ↳ Significant deficiency to controls came to attention  Maintain a list of authorized customers – minimize *if the integrity and honesty of the management and TCwG is exposure to high risk customers. doubted, SEEK LEGAL ADVICE to determine proper action.  Maintain a range of selling prices c) Credit Department – credit review and investigation Non-Compliance with Laws and Regulations [NOCLAR] ► Receive sales order from sales department ► Approves credit – mark “Approved” or issue memo es HAS DIRECT EFFECT ON FS NO DIRECT EFFECT ON FS ► Notify the sales department if approved or not ↳ Affects forms and content, ↳ Affects operations, going ► Forward approved sales order to inventory control accounting issues, accrual concern  Independence from sales department and recognition.  Issues list of authorized customers ul ↳ ex. taxation, pension laws ↳ ex. operating license, d) Inventory control [Warehouse Department] solvency requirements, ► Review and approved sales order from credit dept. environmental regulations ► Monitor availability of goods ordered ↳ auditor should obtain ↳ specific audit procedures to ► Authorize issuance of goods to shipping department rc evidence (ex. positive identify non-compliance (ex. ► Forward sales order to shipping department