Auditing And Assurance PDF

BAPAUD3X 2TAY2425 material respects, in accordance TOPIC 1: AUDITING AND ASSURANCE with an applicable financial SPECIALIZE INDUSTRIES...

BAPAUD3X 2TAY2425 material respects, in accordance TOPIC 1: AUDITING AND ASSURANCE with an applicable financial SPECIALIZE INDUSTRIES reporting framework (AFRF). 2. To report on the FS and CONCEPTS OF FINANCIAL STATEMENT AUDIT communicate as required by the Applicable Financial Reporting Financial statements are the Framework (AFRF), in accordance representation of the reporting entity’s with the auditor’s findings. management who makes the following assertions: Note: o Existence or occurrence The phrases used to express audit o Completeness opinion on the Financial Statements o Rights and obligations are: o Measurement and recognition o “Give a true and fair view” or o Presentation and disclosures o “Are presented fairly, in all To lend credibility to the entity’s prepared material respects“ in financial statements, they must be accordance with the AFRF. examined by an independent certified It is important to understand that the public accountant, who expresses an users cannot assume that the opinion is opinion as to the fairness by which such an assurance as to the future viability of financial statements are presented. the entity or the efficiency or effectiveness with which management AUDITING has conducted the affairs of the entity A systematic process of objectively obtaining and evaluating evidence ASSURANCE regarding assertions about economic actions and events to ascertain the An engagement whereby a practitioner degree of correspondence between expresses a conclusion that enhances the those assertions and established degree of confidence of the users on a criteria and communicating the results subject matter prepared by a “responsible to interested users. party” when the subject matter is The overall objectives of conducting an compared and measured against audit of FS: established criteria. 1. To obtain reasonable assurance Assurance refers to the auditor’s about whether the FS as a whole satisfaction as to the reliability of an are free from material assertion (i.e., the reliability of financial misstatements, whether due to reporting and the preparation of FS) being fraud or error, thereby enabling the made by one party (i.e., entity’s auditor to express an opinion on management) for use by another party whether the FS are prepared, in all BAPAUD3X 2TAY2425 (i.e., the intended users of FS). Limited Assurance (Review) Reasonable assurance is a high, but not - Also aimed at “Reducing Engagement absolute, level of assurance. Risk” to an acceptable level, but that, Elements: there is a higher engagement risk than 1. A three party relationship involves the that when a reasonable assurance is practitioner (CPA), a responsible party, promised, since less extensive and intended users. procedures are performed by the 2. An appropriate subject matter-refers practitioner. to the information to be evaluated or measured against the criteria. Subject Review Engagement matter information means the The auditor expresses a review report that outcome of the evaluation or is designed to enhance the degree of measurement of a subject matter. confidence of intended users regarding 3. Suitable criteria the preparation of an entity’s FS in 4. Sufficient appropriate evidence and accordance with an applicable financial 5. A written assurance report in the form reporting framework. appropriate to a reasonable assurance The auditor’s report is based on the engagement or a limited assurance auditor obtaining moderate/limited level engagement. of assurance. TYPES OF SERVICES/LEVEL OF ASSURANCE The auditor performs primarily inquiry and analytical procedures on a limited scope Reasonable Assurance (Audit) to obtain sufficient appropriate evidence. - Are aimed at “Reducing Engagement The auditor expresses a conclusion on Risk” to an acceptably low level in the whether anything has come to the light of the given circumstance. A auditor’s attention that causes the auditor positive expression is thereby included to believe the FS are not prepared, in all in a practitioner’s report. material respects, in accordance with an o In an audit engagement, the applicable financial reporting framework. auditor provides a reasonable, but not absolute, level of Agreed-Upon Procedure assurance that the FS as a An agreed-upon procedures engagement whole are free from material is an attestation engagement where a CPA misstatements whether due to issues a report of findings based on fraud or error. specific procedures performed on the o An example of an audit subject matter. engagement is the period-end The subject matter can be financial or audit of a company’s FS. nonfinancial. BAPAUD3X 2TAY2425 Needs of an engaging party may widely an existing client vary, the nature, timing, and extent of the o Consider client’s business procedures may vary as well. reputation, the changes on client’s ownership or Agreed-Upon Procedures (AUP) Engagement management and the For agreed-upon procedures, the auditor client’s reporting practices. is engaged to carry out those procedures o Auditor should determine if of an audit nature to which the auditor, the the audit team possess the entity and any appropriate third parties necessary skills, resources have agreed and to report on factual and competence findings. Designed to manage conflicts and When performing agreed-upon threats to auditor. procedures, no opinion is expressed. The auditor should not accept the engagement when based on the COMPILATION ENGAGEMENT assessment, independence would Management may request a professional be compromised. accountant in public practice to assist In repeat engagement, subsequent with the preparation and presentation of relationship shall be assessed to financial information of an entity. determine whether independence In a compilation engagement, although has not been compromised. the users of the compiled information An engagement letter will derive some benefit from the professional document acceptance or retaining accountant’s involvement, it is not an the client. assurance engagement. Involves evaluation of internal It does not require the professional control to determine extent of audit accountant to verify the completeness of procedures necessary to be the information provided by management performed. for the compilation or otherwise to gather The whole audit team should be evidence to express an audit opinion or a involved. review conclusion on the preparation of Tasks are the following: the financial information. o Understanding the clients, Due to the requirements for its business, industry and independence, an auditor is not allowed to accounting policies. prepare the FS that they will later audit. o Obtaining an understanding of the client’s internal THE AUDIT PROCESS control system. 1. Pre-engagement activities o Assessing materiality and Determine whether or not to audit risk; accept a new engagement or retain BAPAUD3X 2TAY2425 o Identification of audit Substantive tests e.g. test of details objectives; and analytical procedures o Determine whether reliance performed to detect material can be place on certain misstatements in account controls; balance, transaction class or o Determine the nature, financial statement presentation extent and timing of and disclosure. substantive tests to be 3. Documentation – Contents performed; and o Source of the document o Designing and finalizing the o Clear purpose of the audit audit program. procedure performed 2. Evidence Gathering or Audit o Conclusions reached based Documentation on the procedure performed Evidence gathered must both be and the evidence gathered sufficient and competent. Two Files of Audit Sufficiency refers to the quantity of Documentation evidence an auditor acquires. o Current files Competence refers to the o Permanent files relevance, validity and reliability of 4. Reporting the evidence obtained. The auditor should review and Because of time element in assess the conclusions drawn completing the audit, examination from the audit evidence of evidence is made on a test basis; obtained as the basis for the auditor testing the samples and expression of an opinion on the generalize results from the financial statements. population from which the samples The auditor’s report should are drawn. contain a clear written This requires that the evidence expression of an opinion on the gathered be persuasive rather than financial statements taken as a convincing. whole. The auditor selects audit General types of audit report procedures based on the o Unmodified objectives, quantity and types o Modified evidence available, materiality and Unmodified Opinion the assesses level of audit risk. Tests of controls are conducted to When the auditor concludes that assess the ability of the entity’s o the financial statements are internal controls to prevent or presented fairly in all material detect material misstatements. BAPAUD3X 2TAY2425 respects with the applicable financial statements of financial reporting framework undetected misstatements, if ▪ PFRS, PFRS for Small and any, could be material but not Medium Sized Entities, pervasive. PFRS for Small Entities This opinion is worded “ except for the o Give a true and fair view (or are effects ( or possible effects) of the presented fairly, in all material matter to which the qualification respects) in accordance with the relates…” applicable financial reporting ADVERSE OPINION framework (par. 35 ISA 700). When the effects of misstatements are both material and pervasive Modified Opinion Applies when sufficient appropriate When based on the audit evidence evidence was obtained but the auditor obtained, the financial statements as a concludes that misstatements, whole, are not free from material individually or in aggregate, are both misstatement or when sufficient material and pervasive to the financial appropriate evidence could not be statements. obtained to conclude that the financial Wordings “…the financial statements do statements as a whole are free from not present fairly the financial position, material misstatement. They can be in the financial performance, and cash flows form of of the …” o Qualified opinion DISCLAIMER OF OPINION o Adverse opinion Basically, means giving no opinion. o Disclaimer of opinion The auditor is unable to obtain sufficient, appropriate audit evidence on which to base the opinion; QUALIFIED OPINION o and the possible effects of When either undetected misstatements, if o Sufficient appropriate evidence any, could be both material and was obtained but the auditor pervasive. concludes that misstatements exist. Individually or in the aggregate, that are material but not pervasive to the financial statements o The auditor is unable obtain sufficient appropriate evidence on which to base the opinion and that the possible effects on the BAPAUD3X 2TAY2425 SPECIALIZED INDUSTRY 3. Insurance Companies IFRS 17 / PFRS 17 Insurance A distinct market that has a unique way of Contracts accounting for transactions and reporting 4. Telecommunications its financial results. PFRS 9 – Financial Instruments These differences are typically permitted PFRS 15 – Revenue from Contracts under the applicable accounting with Customer framework, such as IFRS/PFRS or GAAP. PFRS 16 – Leases CHARACTERISTICS 5. Construction and Real Estate PFRS 15 – Revenue from Contracts Strict and several compliances to laws with Customers and government agencies and their PAS 11 – Construction Contracts regulations. High risk (most are publicly listed or with Public Accountability) Audit Considerations Complex accounting (Revenue Competence recognition) Audit Planning RELEVANT STANDARDS Reliance on experts Laws and Regulations 1. Banking and other financial institutions PFRS 9 Financial Instruments, PFRS 7 Financial Instruments: TOPIC 2: AUDIT OF BANKING AND OTHER Disclosure and FINANCIAL INSTITUTIONS Philippine Auditing Practice Statements (PAPS 1006) – Audits of BANKING INDUSTRY the Financial Statements of Banks PAPS 1004 – The Relationship Is a network of financial institutions whose Between Bangko Sentral ng principal activity is taking deposits and Pilipinas and Bank’s External borrowing for lending and investing. Auditor They are regulated by the Bangko Sentral 2. Mining Industry ng Pilipinas. PAS 16 – Property, Plant and Overall, the financial services industry in Equipment the Philippines is supervised by these PFRS 16 – Leases agencies, namely, the BSP, the SEC, the IFRS 6 / PFRS 6 Exploration of Insurance Commission (IC) and the Evaluation of Mineral Resources Philippine Deposit Insurance Corporation (mining sectors) (PDIC). BAPAUD3X 2TAY2425 the rural and cooperative banks. Nature and Background of the Banking Industry b. In the Philippines, the type of The banking and finance sector is business a bank is allowed to primarily responsible undertake depends on the type of o for mobilizing domestic savings bank license (e.g., universal bank, and converting these funds into commercial bank, thrift bank, rural directly productive investments. bank, etc.) and the special Financing the needs of firms to raise authorities granted to it by the BSP. productive capacity by 2. Non-bank financial institutions o purchasing additional capital a. insurance companies, pension equipment, fund institutions, investment o acquiring or leasing idle property, banks, financing companies, o building and expanding factories, pawnshops and mutual fund and increasing inventory institutions are responsible for sustaining economic Overview, Updates on the Banking Industry in growth in the long term, alongside the the Philippines creation of new jobs. Banks perform the function of The Bangko Sentral ng Pilipinas (BSP) is o safekeeping money and valuables the independent central monetary o extending loans, credit and authority of the Philippines that has payment services in the form of regulatory and supervisory power over checking accounts, money orders, banks and non-bank financial institutions. cashier’s checks as well as The BSP supervises the nation’s banking o issuance of debit and credit cards system. Large banks (particularly the universal and Non-bank financial institutions such as commercial banks) are also allowed to insurance companies and investment o engage in other intermediation houses are overseen by the Insurance activities such as investment Commission and Securities and Exchange banking (underwriting debt Commission, respectively. instruments and or stocks for other firms) and o may offer other forms of portfolio Universal banking investment instruments and provides all kinds of services of insurance products. commercial banking and exercise the Two General Groups of Financial System powers of an investment house, asset management, insurance services and 1. Banks invest in non-allied enterprises. a. universal banks, commercial o In the Philippines, these kinds of banks, thrift or savings banks and banks are the largest group of BAPAUD3X 2TAY2425 financial institutions and the most needs of farmers and fishermen as popular among customers with well as of cooperatives and different financial needs because merchants in rural areas. of its wide array of financial Distinguishing Characteristics of Banks services. In carrying out the audit of a bank’s Commercial Banks financial statements, the external auditor main services in the Philippines are recognizes that banks have the following accepting deposits, offering checking characteristics that generally distinguish and/or savings account services and offer them from most other commercial financial services to businesses such as enterprises, and which the auditor takes providing loans. into account in assessing the level of inherent risk. (PAPS 1004) Savings Bank also known as Thrift Banks Custody of large amounts of monetary financial institution that gathers savings, items, including cash and negotiable paying interest or dividends to savers. It instruments, whose physical security has channels the savings of individuals who to be safeguarded during transfer and wish to consume less than their incomes while being stored. to borrowers who wish to spend more. Custody and control of negotiable They are designed to serve consumers instruments and other assets that are rather than businesses. In other words, readily transferable in electronic form. this bank primarily offers consumer o The liquidity characteristics of accounts and loans. these items make banks vulnerable to misappropriation and fraud. Cooperative Bank o Banks therefore need to establish organized, owned and controlled by formal operating procedures, well- cooperative organizations, for the purpose defined limits for individual of providing financial and credit services discretion and rigorous systems of to cooperative and their members. internal control. Often engaging in transactions that are Rural Banks initiated in one jurisdiction recorded in a are one of the key channels to distribute different jurisdiction and managed in funds to businesses in their localities. another jurisdiction. They can also educate and encourage Operating with very high leverage (that is, positive entrepreneurial activity. Rural and the ratio of capital to total assets is low), community banks have a key role in the which increases banks’ vulnerability to country's economic development. adverse economic events and increases o In particular, the primary objective the risk of failure of rural banks is to meet the credit BAPAUD3X 2TAY2425 o With consequential difficulties in Bank assets can rapidly change in value, maintaining uniform operating whose value is often difficult to determine. practices and accounting systems, Consequentially, a relatively small particularly when the branch decrease in asset values may have a network transcends national significant effect on their capital and on boundaries. their regulatory solvency. Transactions can often be directly initiated Significant amount of their funding is and completed by the customer without generally derived from short- term any intervention by the bank’s employees deposits (either insured or uninsured) o E.g. over the Internet or through which means a loss of confidence by automatic teller machines (ATMs). depositors in a bank’s solvency may They are regulated by the BSP, whose quickly result in a liquidity crisis. regulatory requirements often influence Having fiduciary duties in respect of the the accounting principles that banks assets they hold that belong to other follow. persons. o Non-compliance with regulatory o This may give rise to liabilities for requirements, for example, capital breach of trust. adequacy requirements, could o It is therefore necessary to have implications for the bank’s establish operating procedures financial statements or the and internal controls designed to disclosures therein. ensure that they deal with such Customer relationships that the auditor, assets only in accordance with the assistants, or the audit firm may have with terms on which the assets were the bank might affect the auditor’s transferred to the bank. independence in a way that customer Engaging in a large volume and variety of relationships with other organizations transactions wherein the value may be would not. significant. They may issue and trade in complex o This ordinarily requires complex financial instruments, some of which may accounting and internal control need to be recorded at fair values in the systems and widespread use of financial statements. Information Technology (IT). o They therefore need to establish Ordinarily operating through networks of appropriate valuation and risk branches and departments that are management procedures geographically dispersed. o This necessarily involves a greater decentralization of authority and dispersal of accounting and control functions,