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AUDIT – AN OVERVIEW 1. Audit function operates on the assumption that all financial data are
TYPES OF AUDITS verifiable
2. Auditor should always maintain independence with respect to the fs
1. Financial Statement audit under audit
2. Compliance audit 3. There should be no long term conflict between the auditor and the
3. Operational audit client management
4. Effective internal control system reduces the possibility of errors
CHARACTERISTIC IN COMMON
and fraud affecting fs
1. Systematic examination and evaluation of evidence 5. Consistent application of GAAP or PFRS results in fair presentation
2. Communication of the results of the examination of FS
6. What was held true in the past will continue to hold true un the
TYPES OF AUDITOR future in the absence of known conditions to the contrary
7. An audit benefits the public
1. External Auditor
2. Internal auditor ASSURANCE ENGAGEMENTS
3. Government auditors
- Are intended to enhance the credibility of information about a
Inherent limitations subject matter by evaluating whether the subject matter conforms
in all material respects with a suitable criteria
1. Sampling risk
2. Non sampling risk ELEMENTS OF AE
3. Reliance on Management Presentation
4. Inherent limitations of the client’s accounting and internal control 1. Three party relationship
systems 2. Appropriate subject matter
5. Nature of evidence 3. Suitable/established criteria
4. Sufficient appropriate evidence
GENERAL PRINCIPLES GOVERNING THE AUDIT OF FS 5. A written assurance report

1. comply with the “Code of Professional Ethics” promulgated by BOA *notes:

2. conduct audit in accordance with PSA
3. plan and perform audit with an attitude of professional skepticism (1) management is responsible for preparing and presenting FS in
accordance with framework.
NEED FOR INDEPENDENT FS AUDIT (2) Auditor’s opinion is not a guarantee, it is designed to provide only
reasonable assurance.
1. conflict of interest between mgt and users of fs (3) audit evidence is generally persuasive rather than conclusive in
2. expertise nature
3. remoteness
4. financial consequences

THEORETICAL FRAMEWORK OF AUDITING

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PROFESSIONAL STANDARDS 3. Independence

BOA – promulgated 10 GAAS 4. Acceptance and continuance of client relationships
5. Human Resources and Assignment
PSA – are issued to clarify the meaning of the 10 GAAS 6. Engagement Performance
a. Directing
GAAS (minimum standard of performance the auditors should follow)
b. Supervision
 GENERAL c. Review
o Technical training and proficiency d. Consultation
o Independence e. Engagement Quality Control Review
o Professional care f. Difference of Opinion

 FIELDWORK AUDITOR’S RESPONSIBILITY

o Planning MATERIAL MISSTATEMENTS
o Internal Control Consideration
o Evidential Matter 1. Error
 REPORTING 2. Fraud
o GAAP a. Fraudulent financial reporting (management fraud)
o Inconsistency b. Misappropriation of assets (employee fraud)
o Disclosure
o Opinion RESPONSIBILITY OF MGT

AASC – has been given the task to promulgate auditing standards, practices o To establish a control environment and to implement
and procedures control policies and procedures designed to ensure, among
others, the detection and prevention of fraud and error.
- Approved adoption of: (issued by IAASB created by IFAC)
o ISAs RESPONSIBILITY OF INDIVIDUALS CHARGED WITH GOVERNANCE
o ISAEs o To ensure the integrity of an entity’s accounting and
o ISREs financial reporting systems and that appropriate controls
o ISRS are in place.
ELEMENTS OF A SYSTEM OF QUALITY CONTROL PLANNING PHASE
1. Leadership Responsibilities for quality on audits o Make inquiries
2. Ethical requirements o Assess the risk *fraud risk factors
a. Integrity
b. Objectivity TESTING PHASE
c. Professional competence and due care o Perform procedures necessary to determine whether material
d. Confidentiality misstatements exist
e. Professional behavior o Consider whether misstatement resulted from fraud or error

If not material
 Refer the matter to the appropriate level of
management at least one level above those involved
 Be satisfied that the fraud has no other implications for
other aspects of the audit or that those implications
have been adequately considered
 If material
 Consider implication for other aspects of the audit
particularly the reliability of management
representations
 Discuss the matter and approach to further
investigation with an appropriate level of that is
at least one level above those involved
 Attempt to obtain evidence to determine
whether a material fraud in fact exist and, if so,
their effect
 Suggest the client consult with legal counsel about
questions of law
COMPLETION PHASE
o Obtain a written representation from the client’s
management that:
 It acknowledges its responsibility for the
implementation and operations of accounting and
internal control systems that are designed to
prevent and detect fraud and error
 It believes the effects of those uncorrected fs
misstatements are immaterial
 It has disclose to the author all significant facts
relating to any frauds
 It has disclosed to auditor the results of its
assessment of the risk that the fs may be materially
misstated as a result of fraud
CONSIDER THE EFFECT OF THE AUDITOR’S REPORT
o If he believes that material error or fraud exists, he should
request the management to revise the fs. Otherwise, the
auditor will express a qualified or adverse opinion
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o If he is unable to evaluate because of a limitation on the
scope of the auditor’s examination, auditor should either
qualify or disclaim his opinion on the fs.
*notes
(1) the risk of not detecting a material misstatement resulting from
fraud is higher than the risk of not detecting misstatement resulting
from errors
3. Noncompliance with laws and regulations (tax evasion, violation
of environmental protection laws, and inside trading of securities)
MANAGEMENT’S RESPONSIBILITY
o To ensure that the entity’s operations are conducted in
accordance with laws and regulations.
AUDITOR’S RESPONSIBILITY
o To recognize that noncompliance by the entity with laws
and regulations may materially affect the fs.
PLANNING PHASE
 Obtain a general understanding of the legal and
regulatory framework
 Design procedures to help identify instances of
noncompliance
 Obtain sufficient appropriate audit evidence about
compliance with those laws and regulations
TESTING PHASE
 If there is possible instance of noncompliance,
obtain understanding to evaluate the possible
effect on the fs
 If there is noncompliance, document the findings,
discuss them with management and consider the
implication on other aspects of the audit
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COMPLETION PHASE 2. About account balances at the period end

a. Existence
 Obtain written representations that management b. Rights and obligations
has disclosed to the auditor all known actual or 3. About presentation and disclosure
possible noncompliance with laws and regulations a. Occurrence and rights and obligations
that could materially affect the fs b. Completeness
c. Classification and understandability
CONSIDER THE EFFECT ON THE AUDITOR’S REPORT d. Accuracy and valuation

 If there is noncompliance, request the management AUDIT PROCEDURES

to revise the fs 1. Inspection
 If a scope of limitation has precluded the auditor 2. Observation
from obtaining sufficient appropriate evidence to 3. Inquiry
evaluate the effect of noncompliance with laws and 4. Confirmation
regulations, the auditor should express a qualified 5. Re-computation
opinion or disclaimer of opinion 6. Analytical Procedures

FRAUD RISK FACTORS RELATING TO MISSTATEMENTS RESULTING FROM

FRAUD
AUDIT EVIDENCE
1. MANAGEMENT FRAUD
a. Management’s characteristics and influence over the Primarily focused but not limited on:
control environment a. Source documents
b. Industry conditions b. Accounting records underlying fs
c. Opening characteristics and financial stability c. Corroborating info from other sources
2. EMPLOYEE FRAUD
a. Susceptibility of assets to misappropriation OVERVIEW OF AUDIT PROCESS
b. Controls
1. Accepting an engagement
THE AUDIT PROCESS 2. Planning the Audit
FS – AUDIT PROCEDURES – AUDIT EVIDENCE – AUDIT OPINION 3. Considering the Internal Control
4. Performing Substantive Tests
FS ASSERTIONS: (subj matter of fs audit) 5. Completing the Audit
1. About classes of transactions and event for the period under audit 6. Issuing a Report
a. Occurrence
b. Completeness
ACCEPTING AN ENGAGEMENT
c. Accuracy Firm should consider:
d. Cut off
o Competence
e. Classification
o Independence
o Ability to serve the client properly
o Integrity of the prospective client’s management
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Preliminary planning activities: The auditor does not normally send new engagement letter every year,
but these following factors may have caused the auditor to send a new
 Performing procedures regarding the continuance of the client engagement letter:
relationship and the specific audit engagement
 Evaluating compliance with ethical requirements, including  Any indication that the client misunderstands the objective and
independence scope of the audit
 Establishing an understanding of the terms of the engagement  Any revised or special terms of the engagement
 A recent change of senior management, board of directors or
This task would also involve ownership
 A significant change in the nature or size of the client’s business
1. Making inquiries of appropriate parties in the business community
2. Communicating with the predecessor auditor  Legal requirements and other government agencies
pronouncements
 Incoming auditor’s inquiry from predecessor would include:
o The predecessor auditor’s understanding as to the reasons for the
AUDIT PLANNING
change of auditors
o Any disagreement between the predecessor auditor and client
Audit planning involves developing a general audit strategy and a detailed
o Any facts that might have a bearing on the integrity of the approach for the expected conduct of the audit.
prospective client’s management
Auditor’s main objective: to determine the scope of audit procedures to be
ENGAGEMENT LETTER performed

 To express an opinion on the fs

 Management’s responsibility for the fair presentation of the fs
The extent of planning will vary according to:
 Scope of audit
 Forms or any reports or other communication that the auditor a. The size of the entity
expects to issue b. The complexity of the audit
 The fact that because of the limitations of the audit, there is an c. The auditor’s experience with the entity, and knowledge of the
unavoidable risk that material misstatements may remain business
undiscovered
 The responsibility of the client to allow the auditor to have
unrestricted access to whatever records, documentation and other
Importance of Adequate Planning of the Audit Work
information requested in connection with the audit
 Planning helps ensure the appropriate attention is devoted to
Importance of the engagement letter
important areas of the audit
 Avoid misunderstandings with respect to the engagement  It helps identify potential problems
 Document and confirm the auditor’s acceptance of the appointment  It allows the work to be completed expeditiously
 It assists in the proper assignment and coordination of work
 It helps ensure that the audit is conducted effectively and efficiently

The auditor should obtain a sufficient level of knowledge and
understanding of the entity’s business, which can be gathered from the
following sources:
 Review of prior years’ working papers
 Tour of client’s facilities
 Discussion with people within and outside the entity
 Reading books, periodicals, and other publications related to the
client’s industry
 Reading corporate documents and financial reports
Information obtained could be used to assist the auditor in:
 Assessing risks and identifying potential problems
 Planning and performing the audit effectively and efficiently
 Evaluating audit evidence as well as the reasonableness of client’s
representations and estimates
 Providing better service to the client
With regards to understanding, for continuing engagements, the auditor
should update and re-evaluate information gathered previously, including
information in the prior year’s working papers.
However, for first time audit, PSA 510 requires the auditor to obtain
sufficient appropriate audit evidence that:
 The opening balances do not contain misstatements that materially
effect the current year’s fs
 The prior period’s closing balances have been correctly brought
forward to the current period or, when appropriate, have been
restated; and
 Appropriate accounting policies are consistently applied or changes
in accounting policies have been properly accounted for and
adequately disclosed
It requires more work than a repeat engagement because of the problem
associated with the verification of the opening balances of the balance
sheet accounts,
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DEVELOP AN OVERALL AUDIT STRATEGY
An audit plan should be made regarding
 How much evidence to accumulate
 How and when this should be done
The auditor must consider carefully the appropriate levels of materiality and
audit risk, when developing an audit strategy
MATERIALITY
“Information is material if its omission or misstatement could influence the
economic decision of users taken on the basis of the fs.”
In designing an audit plan, the auditor should make a preliminary estimate
of materiality for use during the examination.
Materiality may be viewed as:
 The largest amount of misstatement that the auditor could tolerate
in the fs, or
 The smallest aggregate amount that could misstate the fs
Materiality is a matter of professional judgment and necessarily involves
quantitative factors and qualitative factors.
Importance of Materiality in Planning an Audit
 There is an inverse relationship between materiality and evidence.
This means, the higher the peso amount of materiality, the lower
the needed evidence and the lower the peso amount of materiality,
the higher the needed evidence.
Based on PSA320, materiality should be considered by the auditor:
 In the planning stage, to determine the scope of audit procedures;
and
 In the completion phase of the audit, to evaluate the effects of
misstatements on the fs
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Using Materiality Levels are inconsistent with other relevant information or deviate from predicted
amounts
 Determine the overall materiality – FS level
 Determine the tolerable misstatement – Account Balance level STEPS IN APPLYING ANALYTICAL PROCEDURES
 Compare the aggregate amount of uncorrected misstatement with
the overall materiality PSA 520 requires the auditor to use analytical procedures in the planning
and overall review stages of the audit.
AUDIT RISK MODEL
STEP 1: Develop expectations regarding fs using:
Audit risk = Inherent risk x Control risk x Detection risk
 Prior year’s fs
Steps in Using the Audit risk Model  Anticipated results such as budgets or forecasts
 Industry averages
 Set the desired level of audit risk  Non-financial information
 Assess the level of inherent risk  Typical relationships among fs account balances
 Assess the level of control risk
 Determine the acceptable level of detection risk STEP 2: Compare the expectations with the fs under audit
 Design substantive test
STEP 3: Investigate significant unexpected differences (unusual
Effect of materiality on audit risk and planned audit procedures fluctuations) to determine whether fs contain material misstatements.

- There is an inverse relationship between materiality and the level THE USE OF ANALYTICAL PROCEDURES
of audit risk, that is, the higher the materiality level, the lower the
audit risk and vice versa. Planning

 To determine the nature, timing and extent of the other auditing

procedures
o Understanding the client’s business
o Identify the areas representing specific risks.
RISK ASSESSMENT PROCEDURES
Substantive test
These are procedures performed by auditors to obtain an understanding of
the entity and its environment including its internal control and to assess  To obtain corroborative evidence about particular assertions related
the risk of material misstatements in the fs. These include: to account balance or transaction class

 Inquiries of mgt and others within the entity Completion phase

 Analytical procedures; and
 Observation and inspection  As an overall review of the fs
o To identify unusual fluctuations that were not identified in
ANALYTICAL PROCEDURES the planning and testing phases of the audit
o To confirm conclusions reached with respect to the fairness
Analytical procedures involve analysis of significant ratios and trends, of the fs
including the resulting investigation of the fluctuation and relationships that

DOCUMENTING THE AUDIT PLAN
Audit plan
 An audit plan is an overview of the expected scope and conduct of
the audit. The overall audit plan sets out in broad terms the nature,
timing and extent of the audit procedures to be performed.
Audit program
 The auditor should develop and document an audit program setting
out the nature, timing and extent of planned audit procedures
required to implement the overall audit plan. In effect, audit
program executes the audit strategy. The audit program serves as a
set of instructions to assistants involved in the audit and as a means
to control and record the proper execution of the work
 The form and content of the audit program may vary for each
particular engagement but it should always include a detailed list of
audit procedures that the auditor believes are necessary to
accomplish the audit objectives
Time budget
 A time budget is an estimate of the time that will be spent in
executing the audit procedures listed in the audit program. This
provides a basis for estimating audit fees and assists the auditor in
assessing the efficiency of the assistants.
CONSIDERATION OF INTERNAL CONTROL
INTERNAL CONTROL
 Based on PSA 315, it is the process designed and effected by those
charged with governance, management, and other personnel to
provide reasonable assurance about the achievement the entity’s
objective with regard to reliability of financial reporting
effectiveness and efficiency of operations and compliance with
applicable laws regulations
FOUR ESSENTIAL CONCEPTS OF INTERNAL CONTROL
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Based on the definition stated by PSA 315:
 Internal control is a process
 Internal control is effected by those charged with governance,
management and other personnel.
 Internal control can be expected to provide reasonable assurance of
achieving entity’s objectives
 Internal control is designed to help achieve the entity’s objectives.
Internal control is geared towards the achievement of the entity’s objectives
in the following categories:
 Effectiveness and efficiency of operations
 Compliance with laws and regulations
 Reliability of financial reporting
COMPONENTS OF INTERNAL CONTROL
1. Control Environment
It includes the attitudes, awareness, and actions of management and those
charged with governance concerning the entity’s internal control and its
importance in the entity. It is the foundation for effective internal control,
providing discipline and structure.
Factors reflected in the Control Environment include:
 Integrity and ethical values
 Mgt philosophy and operating style
 Active participation of those charged with governance
 Commitment to competence
 Personnel policies and procedures
 Assignment of responsibility and authority/ organizational structure
2. Risk Assessment
Management should adopt policies and procedures that are designed to
identify and analyze the risk affecting the entity’s business and to take
the appropriate action to manage these risks
Business risk is the risk that the entity’s business objective will not
be attained as a result of internal and external factors such as

technological developments, changes in customers demand and other
economic changes.
3. Information and Communication Systems
The information system relevant to financial reporting objectives, which
includes the financial reporting system, consist of procedures and
records established to initiate, record, process and report entity
transactions and to maintain accountability for the related assets,
liabilities and equity.
4. Control Activities
Control activities are the policies and procedures that help ensure that
management directives are carried out. Specific control procedures that
are relevant to fs audit would include:
 Performance reviews
 Information processing
 Physical controls
 Segregation of duties
5. Monitoring
It is the process of assessing the quality of internal control performance
over time. It involves assessing the design and operation of controls on
a timely basis and taking necessary corrective actions. Monitoring is
done to ensure that controls continue to operate effectively.
CONSIDERATION OF INTERNAL CONTROL
Consideration of the entity’s internal control system involves the following
steps:
1. Obtain understanding of the internal control
This will involve evaluating the design of the entity’s internal control by:
 Making inquiries of appropriate individuals
 Inspecting documents and records; and
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 Observing of entity’s activities and operations
After obtaining sufficient knowledge about the design of the systems, the
auditor should determine whether these controls have been implemented
by performing “walk-through test”. Walk-through test also confirms the
auditor’s understanding of how the accounting systems and control
procedures functions.
The auditor uses the understanding of internal control to
 Identify types of potential misstatements that can occur
 Consider factors that affect the risk of material misstatements
 Design the nature, timing, and extent audit procedures to be
performed
2. Document the understanding of accounting and internal control
systems
After obtaining sufficient knowledge about the design of internal control
system and verifying that the policies and procedures are implemented, the
auditor needs to document his understanding of accounting the internal
control systems using some of these commonly used forms of
documentation
 Narrative description
 Flowchart
 Internal control questionnaire
3. Assess the level of control risk
The auditor should make a preliminary assessment of control risk, at the
assertion level, for each material account balance or class transactions. The
auditor’s preliminary assessment of control risk may be at a high level (not
effective) or less than high level (effective/more efficient to rely on)
If assessed at a high level (100% / not effective) no need to perform test of
controls.
If assessed at less than high level (effective/more efficient to rely on) the
auditor should

 Identify specific internal control policies or procedures that are
likely to prevent or detect and correct material misstatement
relevant to fs assertion, and
 Perform test of controls to determine the effectiveness of such
policies or procedures
4. Perform test of controls
If preliminarily assessed at a less than high level, the auditor must test these
controls to obtain evidence that they are working effectively as the
preliminary assessment suggests
Test of controls are performed to obtain evidence about effectiveness of
the design and operation of the internal controls.
Test of controls generally consist of one (or a combination) of the following
evidence gathering techniques – inquiry, observation, inspection, and re-
performance.
Timing of test of controls
Auditors usually perform test of controls during an interim visit in advance
of period end. In determining whether or not to test the remaining period,
the following factors must be considered:
 The result of the interim test
 The length of the remaining period
 Whether changes have occurred in the accounting and internal
control systems during the remaining period.
Extent of test of control
The auditor cannot possibly examine all transactions related to certain
control procedures. In an audit, the auditor should determine the size of
sample sufficient to support the assessed level of control risk.
Using the result of test of control
As a result of this evaluation, the conclusion reached is called the assessed
level of control risk. The auditor uses the assessed level of control risk
P a g e | 10
(together with the assessed level of inherent risk) to determine the
acceptable level of detection risk. In this regard, the auditor may consider
modifying:
 The nature of substantive test from less effective to more effective
procedures
 The timing of substantive test by performing them at year-end
rather than at interim
 The extent of substantive test from smaller to larger sample size
5. Document the assessed level of control risk
If assessed at a high level, the auditor should document his conclusion that
control risk is at a high level
If assessed at less than high level, the auditor should document his
conclusion that control risk is less than high and the basis for the
assessment which is actually the results of test of control. The auditor
cannot assess control risk at less than high level without performing test of
control
AUDIT OBJECTIVES, PROCEDURES, EVIDENCE AND DOCUMENTATION
Substantive tests are audit procedures designed to substantiate the
account balances or to detect material misstatements in the fs.
There are two types of substantive tests:
1. Analytical procedures
When intending to perform analytical procedures as substantive tests, the
auditor should focus on those accounts that are predictable. The following
generalizations may be helpful in assessing the predictability of the
accounts.
 IS are more predictable compared to BS account.
 Accounts that are not subject to management discretion are
generally predictable
 Relationships in a stable environment are more predictable than
those in a dynamic or unstable environment

2. Test of details
Test of details involves examining the actual detail making up the various
account balances. This approach may take the form of test of details of
balances or test of details of transactions.
 Test of details of balances involves direct testing of ending balance
of an account
 Test of details of transactions involves testing the transactions
which give rise to the ending balance of an account
Effectiveness of substantive tests
The potential effectiveness of the auditor’s substantive test is affected by its
nature, timing and extent
Nature – high or low quality of evidence to be gathered
Timing – substantive tests may be performed at interim date or at
year end
Extent – more or less extensive
AUDIT EVIDENCE
Evidence refers to the information obtained by the auditor in arriving at the
conclusions on which the audit opinion is based
 Underlying accounting data refers to the accounting records
underlying the fs. These include books of accounts, related
accounting manuals, worksheet supporting cost allocations and
reconciliations prepared by the client personnel
 Corroborating information supporting the underlying accounting
data obtained from client and other sources. This includes
documents such as invoices, bank statements, purchase orders,
contracts, checks and other information obtained or developed by
the auditor through confirmation, recalculation, observation, and
reconciliation.
QUALITIES OF EVIDENCE
Sufficiency refers to the amount of evidence that the auditor should
accumulate.
P a g e | 11
The following factors may be considered in evaluating the sufficiency of
evidence:
 The competence of evidence
 The materiality of the item being examined
 The risk involved in a particular account
 Experience gained during previous audit may indicate the amount
of evidence taken before and whether such evidence was enough
Appropriateness is the measure of quality of audit evidence and its
relevance to a particular assertion and its reliability.
 Relevance relates the timeliness of evidence and its ability to satisfy
the audit objective
 Reliability relates to the objectivity of evidence and is influenced by
its source and by its nature
While reliability of audit evidence is dependent on individual circumstance,
the following generalizations could help the auditor in assessing the
reliability of audit evidence:
 Generated from outside sources over internally generated
 If related accounting and internal control systems are effective,
sources generated internally are more reliable
 Obtained directly by the auditor over obtained by the entity
 Documents and written representations form over oral
representations
AUDIT DOCUMENTATION / WORKING PAPERS
Working papers are records kept by the auditor that documents the audit
procedures applied, information obtained and conclusions reached. PSA 30
requires the auditor to document matters that are important to support an
opinion on fs, and evidence that the audit was conducted in accordance
with PSA.
Primary functions of the working papers
 Support the auditor’s opinion on fs
 Support the auditor’s representation as to compliance with PSA.
 Assist the auditor in the planning, performance, review and supervision of
the engagement.

Secondary functions of the working papers
 Planning future audits
 Providing information useful in rendering other services
 Providing adequate defense in case of litigation
Form, Content and Extent of Audit Documentation
In deciding on the form, content and extent of audit documentation, the
auditor should consider what would enable and experienced auditor, having
no previous connection with the audit, to understand:
 The nature, timing, and extent, of the audit procedures performed
to comply with PSAs and applicable legal and regulatory
requirements.
 The results of the audit procedures and the audit evidence
obtained; and
 Significant matters arising during the audit and the conclusion
reached thereon
Classification of working papers
In a continuing engagement, working papers are typically classified into
permanent file or current working paper file:
1. Permanent file – contains information of continuing significance to
the auditor in performing recurring audits.
2. Current file – contains evidence gathered and conclusions reached
relevant to the audit of a particular year.
Important guidelines on working papers
Owner – auditor
Confidentiality – the auditor cannot disclose confidential information to
third parties unless under the following circumstances:
a. When disclosure is required by law or when the working papers are
subpoenaed by a court
b. When there is a professional right to disclose information such as
when the auditor uses his working papers to defend himself when
sued by the client for negligence
P a g e | 12
Retention – 5 years (for SEC – 7 years)
Preparation – the auditor can use the following techniques:
a. Heading
b. Indexing
c. Cross-indexing / cross-referencing
d. Tick marks
AUDIT SAMPLING AND COMPLETING THE AUDIT AND POST AUDIT
RESPONSIBILITIES
AUDIT SAMPLING
PSA 530 defines audit sampling as
“The application of audit procedures to less than 100 % of the items within
an account balance or class of transactions such that all sampling units have
a chance of selection”
Risks in Sampling
1. Sampling risk – the risk that the sample selected for testing may not
be truly representative of a population
a. Alpha risk – is the risk the auditor will conclude:
i. In the case of test of control, that internal control is
not reliable when in fact that it is effective and can
be relied upon (risk of under reliance); or
ii. In the case of substantive test, that material
misstatements exists in an account balance or
transaction class when in fact such misstatement
does not exist (risk of incorrect rejection)
b. Beta risk – is the risk the auditor will conclude,
i. In the case of test of control, that internal control is
reliable when in fact it is not effective and cannot
be relied upon (risk of over reliance)
ii. In the case of substantive test, that material
misstatement does not exist when in fact material
misstatement does exist (risk of incorrect
acceptance)
 P a g e | 13

2. Non – sampling risk – the risk that the auditor may draw incorrect
conclusions because of human errors such as, application of
inappropriate audit procedures, failure to recognize errors in the
sample tested, and misinterpretation of evidence obtained. This
includes all aspects of audit risk that are not due to sampling
Minimizing risk in sampling
a. Attribute sampling
 A sampling plan used to estimate the frequency of occurrence of
certain characteristics in a population (occurrence rate)
 Generally used when performing tests of controls to estimate the
rate of deviations from prescribed internal control policies or
procedures

The only way to eliminate sampling risk is to examine the entire population b. Variable sampling
but time and cost constraints will prohibit the auditor in doing so, instead,  A sampling plan used to estimate a numerical measurement of a
auditors control sampling risk by population such as peso value
 Generally used in performing substantive tests to estimate the
 Increasing the sample size; and amount of misstatements in the fs
 Using an appropriate sample selection method
Basic steps in auditing
Non-sampling risk, cannot be eliminated even if the auditor examines the
entire population. The risk, however, can be minimized by Audit procedures carried out by means of sampling techniques require
consideration of at least the following basic steps:
 Proper planning; and
1. Define the objective of the test
 Adequate direction, review and supervision of the audit team
2. Determine the audit procedure to be performed
General Approaches to audit sampling 3. Determine the sample size
4. Select the sample
There are two sampling approaches that can be used by the auditor to 5. Apply the procedures
gather sufficient appropriate evidence: 6. Evaluate the sample results

a. Statistical sampling – is a sampling approach that Sampling for test of controls

 Uses random based selection of sample; and
 Uses the law of probability (mathematical formula) to measure
sampling risk, making it quantifiable and evaluate sample results
b. Non-statistical sampling – is a sampling approach that purely uses
auditor’s judgment in estimating sampling risks, determining sample
size and evaluating sample results.
Audit Sampling Plans
Audit sampling may be used when performing either tests of controls or
substantive tests. In instances statistical sampling is used, it can be either:
Factors in determining the sample size
1. Acceptable sampling risk – the level of sampling risk the auditor is
willing to accept. It has an inverse relationship with the sample size.
2. Tolerable deviation rate – the maximum rate of deviations the
auditor is willing to accept, without modifying the planned degree
of reliance on the internal control. It has an inverse relationship
with the sample size
3. Expected deviation rate – is the rate of deviations the auditor
expects to find in the population before testing begins. It has a
direct relationship with the sample size

PSA 530 has identified tree principal methods of selecting samples:
1. Random number selection
2. Systematic selection
3. Haphazard selection
Other sampling applications for test of controls:
1. Sequential sampling (stop-or-go sampling)
2. Discovery sampling
Evaluation of results
1. Determine the sample deviation rate
2. Compare the deviation rate vs tolerable deviation rate and draw an
overall conclusion about the population.
a. If sample deviation rate > the tolerable rate, assess control
risk at a high level and perform more extensive substantive
tests.
b. If sample deviation rate < the tolerable rate, consider
allowance for sampling risk:
1. If the sampling deviation rate is considerably lower than
the tolerable deviation rate, assess control risk at a low
level, rely on internal control and perform less extensive
substantive tests.
2. If the sampling deviation rate is barely lower than the
tolerable deviation rate:
a. When using non-statistical sampling, assess
control risk at a high level and perform more
extensive substantive tests.
b. When using statistical sampling the auditor
determines the maximum population deviation
rate by using a sampling table or statistical
formula then compares vs. the tolerable rate to
evaluate the sample results.
 If the maximum deviation rate exceeds the
tolerable rate, the auditor will assess
control risk at a high level and perform
more extensive substantive tests.
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 If it does not exceed, assess control risk at a
low level, rely on internal control and
perform less extensive substantive tests.
Sampling for Substantive Tests
Factors in Determining the Sample Size
1. Acceptable sampling risk – for practical purposes, auditor use the
acceptable level of detection risk as the acceptable sampling after
giving adequate consideration to the risk that analytical procedures
may fail to detect material misstatement in account balance. It has
an inverse relationship with the sample size.
2. Tolerable misstatement – the maximum amount of misstatement
that the auditor will permit in the population and still be willing to
conclude that the account balance is fairly stated. It has an inverse
relationship with the sample size.
3. Expected misstatement – the amount of misstatement that the
auditor believes exists in the population. It has a direct relationship
with the sample size.
4. Variation in the population – In most cases, the peso amount,
included in the population, tend to vary significantly. When using
statistical sampling, this variability is measured by the standard
deviation. It has a direct relationship with the sample size. The
auditor can estimate the variation based on the prior year’s tests
results or pilot sample.
Sample Selection Methods
When selecting a sample for substantive test, the auditor may use anyone
of the sample selection methods mentioned in earlier. In addition, he may
use:
1. Stratified sampling – the auditor may divide or stratified the
population into meaningful groups in order to decrease the effect of
the variance within the population and allows the auditor to give
more emphasis to those items with higher monetary value.
2. Value weighted selection – the probability of an item to be selected
in this method of selection is directly proportional to the monetary
value of such item.

Evaluation of results
1. Project the misstatements to the population
Projecting misstatement can be accomplished using:
a. Ratio estimation – uses the book values of the population
size and the sample size to project the misstatements
b. Difference estimation – uses the number of customers to
project misstatements to the population
2. Compare the projected misstatement vs. the tolerable
misstatements and draw an overall conclusion
a. If the projected misstatement > tolerable misstatement,
the auditor will conclude that the account balance is
materially misstated. In this case, the auditor may:
i. Examine additional units
ii. Perform suitable alternative procedures
iii. Request the client to adjust the account balance
b. If the projected misstatement < tolerable misstatement,
the auditor should consider the allowance for sampling risk.
Anomalous errors – errors or misstatements arise from an isolated event
that has not recurred other than specifically identifiable occasions and are
therefore not representative of errors in the population. Such errors should
be excluded when projecting sample errors to the population. However,
the effect of such errors must be considered together with the projected
errors in order to determine the combined effect of the errors on the
account balance or transaction class.
COMPLETING THE AUDIT & POST AUDIT RESPONSIBILITIES
PROCEDURES
1. Identify subsequent events that may affect the fs under audit
2. Identify contingencies such as litigation, claims and assessment
3. Obtain written management representation
4. Perform wrap-up procedures
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Subsequent Events
Classification:
1. Requiring adjustments – those that provide further evidence of
conditions that existed at the balance sheet date
2. Requiring disclosures – those that are indicative of conditions that
arose subsequent to the balance sheet date
Procedures to identify subsequent events
1. Inquire management about any subsequent events
2. Review procedures management has established to identify
subsequent events
3. Review minutes of board of directors and stockholder’s meeting
4. Read the latest available interim fs as well as management reports
such as budgets and forecasts
5. Inquire about litigation, claims and assessments
Contingencies
Litigations, claims, and assessment
- PSA 501 requires the auditor to carry out procedures in order to
become aware of any litigation and claims
- Management is the primary source of information about litigation,
claims, and assessment.
- Auditor shall corroborate the information obtained from
management by asking the client to send letters of audit inquiry to
lawyers
- A qualified or disclaimer of opinion shall be issued if management
refuses to give the auditor permission to communicate with the
lawyer or if the lawyer refuses to reply
- An unmodified opinion with emphasis if a matter paragraph shall be
issued if the lawyer is unable to estimate the likelihood of an
unfavorable outcome including the amount of or range of potential
loss

Management representation
Form and Content of Written Representation
Form – representation letter
Content
1. A representation that management has fulfilled its responsibility for
the preparation and presentation of the fs as set out in the terms of
the engagement
2. A representation that the fs are prepared and presented in
accordance with the applicable reporting framework
3. A representation that management provided that auditor with all
relevant information agreed in the terms of the engagement, and
that all transactions have been recorded and reflected in the fs
4. A representation that describes management’s responsibilities as
described in the terms of the engagement
5. Other representation required by other PSAs
Basic Elements of a Written Management Representation
1. Should be addressed to the auditor
2. Date of written representations shall be as near as practicable to,
but not after, the date of the auditor’s report
3. Should be signed by the appropriate level of management who has
the primary responsibility for the fs
Wrap-up procedures
Procedures done at the end of the audit, that generally cannot be
performed before the other audit work is complete. These include:
1. Final analytical procedures
2. Evaluation of the entity’s ability to continue as a going concern
3. Evaluating audit findings and obtaining client’s approval for the
proposed adjusting entries
Post audit responsibilities
Auditor does not have any responsibility to perform additional procedures
after the fs are issued. However, when the auditor becomes aware that the
P a g e | 16
audit report issued in connection with the fs may be inappropriate, he must
take steps to prevent future reliance on such report
Auditing in CIS Environment
Characteristics of CIS
 Lack of visible transaction trails
 Consistency of performance
 Ease of access to Data and Computer programs
 Concentration of duties
 Systems generated transactions
 Vulnerability of data and program storage media
 Minimizing Risk in sampling
Internal Control in a CIS Environment
Control procedures used in manual processing are also applied in a CIS
environment. When computer processing is used in significant accounting
applications, internal control procedures can be classified into two types:
1. General controls – are those controls policies and procedures that
relate to the overall computer information system
2. Application controls – are those policies and procedures that relate
to specific use of the system. These are designed to provide
reasonable assurance that all transactions are authorized, and that
they are processed completely, accurately and on a timely basis.
General Controls
General controls include:
1. Organizational controls
In a CIS environment, the plan of the organization for an entity’s
computer system should include:
a. Segregation between the CIS department and user departments
b. Segregation of duties within the CIS department
 P a g e | 17

2. Systems development and documentation controls  Key verification

Adequate systems documentation must be made in order to facilitate
the use of the programs as well as changes that may be introduced later
into the system
3. Access controls
Every computer system should have adequate security controls to
protect equipment, files and programs. Access to the computer should
be limited only to operators and other authorized employees, the use of
passwords must be adopted in order to protect data files and programs
from unauthorized alteration
4. Data recovery controls
A data recovery control provides for the maintenance of back up files
and off-site storage procedures. Computer files should be copied daily
to tape or disks and secured off-site. In the event of disruption,
reconstruction of files is achieved by updating the most recent back-up
with subsequent transaction data. When magnetic tapes are used, a
common practice called Grandfather-father-son practice requires entity
to keep the two most recent generations of master files and transaction
files in order to permit reconstruction of master files if needed.
5. Monitoring controls
Monitoring controls are designed to ensure that CIS controls are
working effectively as planned. These include periodic evaluation of the
adequacy and effectiveness of the overall CIS operations conducted by
persons within or outside the entity
Application Controls
Application controls include:
1. Controls over input
Input control are designed to provide reasonable assurance that data
submitted for processing are complete, properly authorized and accurately
translated into machine readable form. Some examples of input controls
include:
 Limit check
 Field check
 Control totals
 Validity check
 Self-checking digit
2. Controls over processing
Processing controls are designed to provide reasonable assurance that
input data are processed accurately and that data are not lost, added,
excluded, duplicated or improperly changed.
3. Controls over output
Output controls are designed to provide reasonable assurance that the
results of processing are complete, accurate and that these outputs are
distributed only to authorized personnel.
Test of Controls in a CIS Environment
Testing the reliability of general controls may include observing client’s
personnel in performing their duties; inspecting program documentation;
and observing the security measures in force. In testing application
controls, the auditor may either:
 Audit around the computer
 Use computer-assisted audit techniques
Auditing Around the computer
 It involves examination of documents and reports and determine
the reliability of the system, focusing solely on the input documents
and the CIS output.
 It ignores the client’s data processing procedures
 Input data are simply reconciled with the output to verify the
accuracy of processing
 Can only be used if there are visible input documents and detailed
output that will enable the auditor to trace individual transactions
back and forth

This is also known as “block box approach” because it does not permit direct
assessment of actual processing of transaction.
Computer Assisted Audit Techniques (CAATs)
 It is used when computer accounting systems perform tasks for
which no visible evidence is available, it may be impracticable for
the auditor to test manually.
 CAATs are computer programs and data which the auditor uses as
part of the audit procedures to process data of audit significance
contained in an entity’s information systems.
This is also known as “white box approach” because the auditor will have to
audit directly the client’s computer program using CAATs. Some of the
commonly used CAATs include:
1. TEST DATA
The test data technique is primarily designed to test the effectiveness of
the internal control procedures which are incorporated in the client’s
computer program. The objective of the test data technique is to
determine whether the client’s computer programs can correctly handle
valid and invalid conditions as they arise.
2. INTEGRATED TEST FACILITY (ITF)
By using the method of processing test data simultaneously with client’s
data, ITF provides assurance that the program tested by the auditor is
the same program used by the client in processing transactions.
3. PARALLEL SIMULATION
The simulated program is used to reprocess transactions that were
previously processed by the client’s program. The auditor compares the
results obtained from the simulation with the client’s output to be able
to make inference about the reliability of the client’s program. Parallel
simulation can be accomplished using:
a. Generalized audit software
Consist of generally available computer packages which have
been designed to perform common audit tasks such as
P a g e | 18
performing or verifying calculations, summarizing and totaling
files, and reporting in a format specified by the auditor.
b. Purpose written programs
These are designed to perform audit tasks in specific
circumstances. These programs may be developed by the
auditor, the entity being audited or an outside programmer
hired by the auditor.
CAATS for Advanced Computer Systems
1. Snapshots
It involves taking a picture of transaction as it flows through the
computer systems. Audit software routines are embedded at different
points in the processing logic to capture the images of the transaction as
it progresses through the various stages of processing. Such a
technique permits an auditor to track data and evaluate the computer
processes applied to the data.
2. Systems control audit review files (SCARF)
This involves embedding audit software modules within an application
system to provide continuous monitoring of the systems transaction.
The information is collected into a special computer file that the auditor
can examine.
THE AUDITOR’S REPORT ON THE FS
General purpose fs – FS prepared in accordance with a general purpose
framework.
General purpose framework – A financial reporting framework designed to
meet the common financial information needs of a wide range of users. The
financial reporting framework may be a fair presentation framework or a
compliance framework.
Unmodified report (unqualified)
The most common type of audit report contains a clear opinion or an
unmodified opinion. The unmodified opinion may be issued only when the
following conditions have been met:
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 The fs are fairly stated in accordance with applicable Financial 1. Circumstances beyond the control of the entity such as inadequacy
Reporting Framework. of accounting records
 The audit was performed in accordance with PSA. 2. Circumstances relating to the nature or timing of the auditor’s work
like when the auditor is engaged only after client’s fiscal year ends.
BASIC ELEMENTS OF UNMODIFIED REPORT 3. Limitations imposed by management like when management
prevents the auditor from requiring external confirmation of
1. Title
specific accounts
2. Addressee
3. Auditor’s opinion MATERIALITY AND PERVASIVENESS CONSIDERATION
4. Basis for opinion
5. Material uncertainty related to going concern If the magnitude of misstatements is material enough to affect the readers
6. Key audit matters (if listed entity) of the fs, but not enough to overshadow the fair presentation taken as a
7. Responsibilities for the fs whole, the auditor would most likely express a qualified opinion. On the
8. Auditor’s responsibilities for the audit of the fs other hand, if the auditor believes that the effect of the misstatements is
9. Report on other legal and regulatory requirements (if listed entity) highly material and pervasive as to render the overall fs misleading, the
10. Name of the engagement partner auditor would most likely express an adverse opinion.
11. Signature of the auditor
12. Auditor’s Address BASIS FOR MODIFICATION OF PARAGRAPH
13. Date of the Auditor’s Report This paragraph should be placed immediately before the opinion paragraph
MODIFICATION TO THE OPINION with appropriate heading such as “Basis for qualified opinion” “Basis for
Adverse opinion” or “Basis for Disclaimer of opinion”
1. Material Misstatements
a. Material but not pervasive – qualified 1. Material misstatement
b. Material and pervasive - adverse a. Description of the nature of the misstatement or an
2. Scope Limitations explanation of how the disclosure is misstated
a. Material but not pervasive – qualified b. Quantification of the financial effects of the misstatements
b. Material and pervasive – disclaimer of opinion or a disclosure of omitted information, if practicable.
2. Scope limitation
MATERIAL MISSTATEMENT If the modification results from an inability to obtain sufficient
appropriate audit evidence, the basis of the modification paragraph
A material misstatement of the fs may arise from: shall only explain the reason for inability
1. Inappropriate accounting policy selected EMPHASIS OF A MATTER
2. Misapplication of selected accounting policy; or
3. Inappropriate or inadequate disclosure An emphasis of a matter paragraph is included in the report to draw the
reader’s attention to a matter presented or disclosed in the fs that, in the
SCOPE LIMITATION auditor’s judgment, is of such importance that it is fundamental to the
reader’s understanding, the auditor.
A limitation on the scope of the auditor’s work may be imposed by the
client or imposed by circumstances:

It is necessary to include an Emphasis of a matter paragraph on the
following circumstances:
a. Uncertainty relating to the future outcome of exceptional litigation
or regulatory action
b. Early application of new accounting standard in advance of its
effective date
c. Major catastrophe that has a significant effect on the entity’s fs
d. A subsequent discovery of facts affecting the previously issued
opinion
e. Fs prepared using a special purpose framework
OTHER MATTER PARAGRAPH
There are instances when the auditor considers it necessary to
communicate a matter other than those that are presented or disclosed in
the fs that, in the auditor’s judgment, is relevant to users’ understanding of
the audit, the auditor’s responsibilities or the auditor’s report.
It is required to include another matter paragraph on the following
circumstances:
a. Reporting on comparative information
b. Material inconsistency between the fs and other information
c. Fs are prepared using more than one financial framework
d. Limiting the use of auditor’s report
e. Subsequent discovery of facts
OTHER ASSURANCE AND NON-ASSURANCE SERVICES
SPECIAL PURPOSE AUDIT ENGAGEMENS
Special purpose fs – fs prepared in accordance with a special purpose
framework
Special purpose framework – a financial reporting framework designed to
meet the financial information needs of specific users. The financial
reporting framework may be a fair presentation framework or a compliance
framework.
Examples are:
P a g e | 20
 A tax basis of accounting for a set of fs that accompany an entity’s
tax return
 The cash receipts and disbursements basis of accounting for cash
flow information that an entity may be requested to prepare for
creditors
 The financial reporting provisions established by a regulator to meet
the requirements of that regulator; or
 The financial reporting provisions of a contract, such as a bond
indenture, a loan agreement, or a project grant
When accepting the special purpose audit engagement the auditor should:
In an audit of special purpose fs, the auditor shall obtain an understanding
of:
a. The purpose for which the fs are prepared
b. The intended users; and
c. The steps taken by management to determine that the applicable
financial reporting framework is acceptable in the circumstances.
When Planning and performing the special purpose audit engagement
1. The auditor shall determine whether application of the PSAs
requires special consideration in the circumstances of the
engagement
2. The auditor should obtain an understanding of the entity’s selection
and application of accounting policies. In the case of fs prepared in
accordance with the provisions of a contract, the auditor shall
obtain an understanding of any significant interpretations of the
contract that management made in the preparation of those fs. An
interpretation is significant when adoption of another reasonable
interpretation would have produced a material difference in the
information presented in the fs
Special Purpose Audit Engagement Report
The auditor’s report on special purpose fs shall include an emphasis of a
matter paragraph alerting the users of the auditor’s report that the fs are
prepared in accordance with a special purpose framework and that, as a
result, the fs may not be suitable for another purpose.

A. Non- Audit Engagements: Procedures and Reports
Review
Objective: To enable the CPA to report whether anything has come to his
attention that would indicate that the fs are not fairly presented.
Level of assurance provided by the CPA Moderate / limited assurance
Type of report issued: Negative Assurance (Review report)
Basic Procedures performed: Inquiry and Analytical procedures
Independence required? Yes / No: YES
If the auditor has reason to believe that the information subject to review
may be materially misstated, the auditor should carry out additional or
more extensive procedures as are necessary to be able to express negative
assurance or to confirm that a modified report is required
In case of:
1. Material misstatements
a. Express a qualification of the negative assurance
b. When the effect of the matter is so material and pervasive
to the fs that the auditor concludes that a qualification is
not adequate to disclose the misleading or incomplete
nature of the fs, give an adverse statement that the fs are
not presented fairly, in all, material respects, in accordance
with PFRS.
2. Scope limitation
a. Express a qualification of the negative assurance provided
regarding the possible adjustments to the fs that might
have been determined to be necessary had the limitation
not existed; or
b. When the possible effect of the limitation is so significant
and pervasive that the auditor concludes that so level of
assurance can provide, the auditor should not provide any
assurance.
P a g e | 21
Examination of Prospective Financial Information
Prospective financial information means financial information based on
assumption about events that may occur in the future possible actions of
the entity. There are two types of prospective financial information:
A. Forecast – is prepared on the basis of the assumption as to future
events which management expects to take as of the date the information is
prepared (best-estimate assumptions)
B. Projections – is prepared on the basis of hypothetical assumptions of
mixture of best-estimate and hypothetical assumptions.
Auditor’s Responsibility
When examining prospective financial information, according to PSAE 3400,
the auditor should obtain sufficient appropriate evidence that:
1. Management’s best-estimate assumptions are reasonable and, in
the case of hypothetical assumptions, such assumptions are
consistent with the purpose of the information
2. The prospective financial information properly prepared on the
basis of the assumptions;
3. The prospective financial statement is properly presented and all
material assumptions are adequately disclosed
4. The prospective financial information is prepared on a consistent
basis with historical fs
Evidence may be available to support the assumptions on which the
financial information is based, such evidence is itself generally future
oriented and speculative in nature. Therefore, the auditor is not in a
position to express an opinion as to whether the result shown in the
prospective financial information will be achieved
It may be difficult for the auditor to obtain a level of satisfaction sufficient
to express an opinion that the assumptions are free from material
misstatement, therefore, when reporting on the reasonableness of
management’s assumptions, the auditor normally provides only a moderate
level of assurance

B. Non-assurance engagements
Agreed-upon procedures
Objective: To carry out audit procedures agreed on with the client and any
appropriate third parties identified in the report
Level of assurance provided by the CPA: No assurance
Type of report issued: Description of procedures performed and factual
findings
Basic Procedures performed: Procedures will be performed as agreed
Independence required? Yes / No: No.
This type of engagement may be accepted provided:
 The client takes full responsibility for the adequacy of the
procedures to be performed; and
 The distribution of the report is limited only to those parties who
have agreed about the procedures to be performed
The report is restricted to those parties that have agreed to the procedures
to be performed
The auditors should ensure with representatives of the entity and,
ordinarily, other specified parties who will receive copies of the report of
factual findings, that there is a clear understanding regarding the agreed
procedures and the conditions of the engagement
Compilation
Objective: To assist the client in the preparation of the fs
Level of assurance provided by the CPA: No assurance
Type of Report issued: Identification of financial information compiled
(Compilation Report)
Basic procedures performed: Prepare / Assemble Financial Statements
based on client’s data
Independence required? Yes/no: No
P a g e | 22
The financial information compiled by the accountant should contain a
reference such as “Unaudited”, “Compiled without Audit or Review” or
“Refer to Compilation Report” on each page of the financial information or
on the front of the complete set of financial statements
In case of:
1. Material misstatement
a. The accountant should disclose the nature of the
misstatement in a separate paragraph of the report,
although their effects do not have to be qualified
b. If the accountant feels that the modification of the report is
not sufficient to describe the significant PFRS departures
and the client is not willing to correct these deficiencies, the
accountant, may withdraw from, the engagement
2. Scope limitation
- Scope limitation will normally cause the accountant to withdraw
from the engagement
SPECIAL AND OTHER RELATED TOPICS
AUDITING ACCOUNTING ESTIMATES
 Based on PSA 540, “Accounting estimate” means an approximation
of the amounts of an item in the absence of a precise means of
measurement
 The auditor must be specifically careful in considering accounts that
are affected by accounting estimates because the risk of material
misstatement is greater when accounting estimates are involved
 Management is responsible for making accounting estimates
included in the fs
Auditor’s Responsibility
The auditor’s responsibility is to obtain sufficient appropriate evidence as to
whether:
 Accounting estimate is properly accounted for and disclosed
 Accounting estimate is reasonable in the circumstances
The auditor may use one or a combination of the following approaches
when evaluating the reasonableness of accounting estimates:

 Review and test the process used by the management to develop
the estimate
 Make an adequate estimate
 Review subsequent events which confirm the estimate made
RELATED PARTIES
“Related party” refers to persons or entities that may have dealings with
one another in which one party has the ability to exercise significant
influence or control over the other party in making financial and operating
decisions. These would include entity’s associates, principal owners,
directors, officers including their immediate families.
The auditor needs to be aware of them because:
 PFRS requires disclosures in the fs of certain related party
relationships and transactions
 A related party transaction may be motivated by other than
ordinary business considerations such as profit sharing or even
fraud.
 The existence of related parties or related party transactions may
affect the financial statements and the reliability of audit evidence
Management’s Responsibility
Management is responsible for the identification and disclosure of related
parties and transactions with such parties which requires management to
implement adequate accounting and internal control systems to ensure that
transactions with related parties are appropriately identified in the
accounting records and disclosed in the fs
Auditor’s Responsibility
The auditor should obtain and review information provided by the directors
and management identifying the names of all known related parties and
related party transactions
When related party transactions are identified, the auditor should obtain
sufficient appropriate evidence that these are properly accounted for and
disclosed in the fs. The auditor should also obtain a written representation
from management concerning the completeness of information provided
P a g e | 23
regarding the identification of related parties and the adequacy of related
party disclosures in the fs
USING THE WORK OF AN EXPERT
An expert is a person or firm possessing special skill, knowledge and
experience in a particular field other than accounting and auditing.
An expert may be:
 Engaged by the entity
 Engaged by the auditor
 Employed by the entity; or
 Employed by the auditor
When determining the need to use the work of an expert, the auditor would
consider:
 The materiality of the fs item being considered
 The risk of misstatement based on the nature and complexity of the
matter being considered; and
 The quality and quantity of other audit evidence available
When the auditor concludes that the work of the expert is needed to
support an assertion, the auditor should:
1. Assessing the expert’s competence and objectivity
a. The following factors must be considered when assessing
the competence of the expert:
i. Professional certification or licensing by, or
membership in, an appropriate professional body
ii. Experience and reputation in the field in which the
auditor is seeking audit evidence
b. The objectivity of the expert may be impaired if the expert
is
i. Employed by the entity
ii. Related in some other manner to the entity
2. Evaluating the scope of the expert’s work
PSA 620 requires the auditor to obtain sufficient appropriate
evidence that the scope of the auditor’s work is adequate for the
purpose of the audit. This understanding should cover:
 P a g e | 24

 The objectives and scope of the expert’s work in performing routine or mechanical audit procedures. This is an
 Methods and assumptions to be used by the expert acceptable practice provided the external auditor supervises and review
 The intended use by the auditor of the expert’s work the work performed by the internal auditors
 Form and content of the expert’s report
Audit – an overview
 Expert’s relationship to the client
Professional standards
3. Assessing the work of the expert Auditor’s responsibilities
 The auditor should assess the appropriateness of the expert’s work Audit process
as audit evidence regarding the financial statement assertion being Accepting an engagement
considered Audit planning
 If the results of the expert’s work do not provide sufficient Consideration of internal control
appropriate evidence or the results are not consistent with other Audit objectives, procedures, evidence and documentation
evidence, the auditor should resolve the matter by discussing it with Audit sampling & Completing the audit and post-audit
the client and the expert or performing additional procedures, responsibilities
including possibly engaging the services of another expert Auditing in CIS environment
Other assurance and non-assurance services
CONSIDERING THE WORK OF INTERNAL AUDITING Special and other related topics
Code of Ethics (pdf)
Internal auditing is an appraisal activity established within an entity as a
RA 9298 (pdf)
service to the entity. Considering the work of internal auditor involves two
important phases:

1. Making a preliminary assessment of internal auditing

For this purpose, the external auditor should consider the internal
auditor’s:

 Competence
 Objectivity
 Due professional care
 Scope of function

2. Evaluating and testing the work of internal auditing

If based on the foregoing assessment, the external auditor decides to

use the work of the internal auditor, the external auditor will have to
evaluate and test the internal auditor’s work to confirm its adequacy for
the external auditor’s purposes

Aside from using the work performed by the internal auditors, the
external auditor may also request the assistance of the internal auditors