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AUDIT – AN OVERVIEW 1. Audit function operates on the

TYPES OF AUDITS assumption that all financial
1. Financial Statement audit data are verifiable
2. Compliance audit 2. Auditor should always maintain
3. Operational audit independence with respect to
the fs under audit
CHARACTERISTIC IN COMMON 3. There should be no long term
1. Systematic examination and conflict between the auditor and
evaluation of evidence the client management
2. Communication of the results of 4. Effective internal control system
the examination reduces the possibility of errors
and fraud affecting fs
TYPES OF AUDITOR 5. Consistent application of GAAP
1. External Auditor or PFRS results in fair
2. Internal auditor presentation of FS
3. Government auditors 6. What was held true in the past
will continue to hold true un the
Inherent limitations future in the absence of known
1. Sampling risk conditions to the contrary
2. Non sampling risk 7. An audit benefits the public
3. Reliance on Management ASSURANCE ENGAGEMENTS
Presentation
4. Inherent limitations of the - Are intended to enhance the
client’s accounting and internal credibility of information about
control systems a subject matter by evaluating
5. Nature of evidence whether the subject matter
conforms in all material respects
GENERAL PRINCIPLES GOVERNING with a suitable criteria
THE AUDIT OF FS
ELEMENTS OF AE
1. comply with the “Code of
Professional Ethics” 1. Three party relationship
promulgated by BOA 2. Appropriate subject matter
2. conduct audit in accordance 3. Suitable/established criteria
with PSA 4. Sufficient appropriate evidence
3. plan and perform audit with an 5. A written assurance report
attitude of professional *notes:
skepticism
(1) management is responsible for
NEED FOR INDEPENDENT FS AUDIT preparing and presenting FS in
1. conflict of interest between mgt accordance with framework.
and users of fs (2) Auditor’s opinion is not a
2. expertise guarantee, it is designed to provide
3. remoteness only reasonable assurance.
4. financial consequences (3) audit evidence is generally
persuasive rather than conclusive
THEORETICAL FRAMEWORK OF in nature
AUDITING
 Page |2

PROFESSIONAL STANDARDS 3. Independence

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

AUDITOR’S RESPONSIBILITY
 FIELDWORK MATERIAL MISSTATEMENTS
o Planning
o Internal Control 1. Error
Consideration 2. Fraud
o Evidential Matter a. Fraudulent financial
 REPORTING reporting (management
o GAAP fraud)
o Inconsistency b. Misappropriation of assets
o Disclosure (employee fraud)
o Opinion RESPONSIBILITY OF MGT
AASC – has been given the task to o To establish a control
promulgate auditing standards, environment and to
practices and procedures implement control policies
- Approved adoption of: (issued and procedures designed
by IAASB created by IFAC) to ensure, among others,
o ISAs the detection and
o ISAEs prevention of fraud and
o ISREs error.
o ISRS RESPONSIBILITY OF
ELEMENTS OF A SYSTEM OF QUALITY INDIVIDUALS CHARGED WITH
CONTROL GOVERNANCE

1. Leadership Responsibilities for o To ensure the integrity of

quality on audits an entity’s accounting and
2. Ethical requirements financial reporting systems
a. Integrity and that appropriate
b. Objectivity controls are in place.
c. Professional competence PLANNING PHASE
and due care
d. Confidentiality o Make inquiries
e. Professional behavior

o Assess the risk *fraud risk
factors
COMPLETION PHASE
TESTING PHASE
o Perform procedures necessary
to determine whether material
misstatements exist
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 CONSIDER THE EFFECT OF THE
investigation with AUDITOR’S REPORT
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
Page |3
counsel about
questions of law
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
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
o If he is unable to evaluate
because of a limitation on
the scope of the auditor’s
examination, auditor
should either qualify or
 Page |4

disclaim his opinion on the  If there is possible

fs. instance of
*notes noncompliance,
(1) the risk of not detecting a obtain understanding
material misstatement resulting to evaluate the
from fraud is higher than the risk possible effect on the
of not detecting misstatement fs
resulting from errors  If there is
noncompliance,
3. Noncompliance with laws and document the
regulations (tax evasion, findings, discuss
violation of environmental them with
protection laws, and inside management and
trading of securities) consider the
implication on other
aspects of the audit
MANAGEMENT’S
RESPONSIBILITY
o To ensure that the entity’s
operations are conducted COMPLETION PHASE
in accordance with laws
 Obtain written
and regulations.
representations that
AUDITOR’S RESPONSIBILITY
management has
o To recognize that
disclosed to the
noncompliance by the
auditor all known
entity with laws and
actual or possible
regulations may materially
noncompliance with
affect the fs.
laws and regulations
PLANNING PHASE that could materially
affect the fs
 Obtain a general
understanding of the CONSIDER THE EFFECT ON
legal and regulatory THE AUDITOR’S REPORT
framework
 If there is
 Design procedures to
noncompliance,
help identify
request the
instances of
management to
noncompliance
revise the fs
 Obtain sufficient
 If a scope of
appropriate audit
limitation has
evidence about
precluded the auditor
compliance with
from obtaining
those laws and
sufficient appropriate
regulations
evidence to evaluate
TESTING PHASE the effect of
noncompliance with
 Page |5

laws and regulations, 4. Confirmation

5. Re-computation
the auditor should 6. Analytical Procedures
express a qualified
opinion or disclaimer
of opinion AUDIT EVIDENCE
FRAUD RISK FACTORS RELATING TO Primarily focused but not limited on:
MISSTATEMENTS RESULTING FROM
FRAUD a. Source documents
b. Accounting records
1. MANAGEMENT FRAUD underlying fs
a. Management’s c. Corroborating info from
characteristics and other sources
influence over the control
environment OVERVIEW OF AUDIT PROCESS
b. Industry conditions 1. Accepting an engagement
c. Opening characteristics 2. Planning the Audit
and financial stability 3. Considering the Internal Control
2. EMPLOYEE FRAUD 4. Performing Substantive Tests
a. Susceptibility of assets to 5. Completing the Audit
misappropriation 6. Issuing a Report
b. Controls
ACCEPTING AN ENGAGEMENT
THE AUDIT PROCESS
Firm should consider:
FS – AUDIT PROCEDURES – AUDIT
EVIDENCE – AUDIT OPINION o Competence
o Independence
FS ASSERTIONS: (subj matter of fs o Ability to serve the client properly
o Integrity of the prospective client’s
audit) management
1. About classes of transactions Preliminary planning activities:
and event for the period under
audit  Performing procedures
a. Occurrence regarding the continuance of the
b. Completeness client relationship and the
c. Accuracy
d. Cut off specific audit engagement
e. Classification  Evaluating compliance with
ethical requirements, including
independence
2. About account balances at the period end  Establishing an understanding of
a. Existence
b. Rights and obligations
the terms of the engagement
3. About presentation and disclosure
a. Occurrence and rights and
This task would also involve
obligations
b. Completeness
1. Making inquiries of appropriate
c. Classification and understandability parties in the business
d. Accuracy and valuation community
AUDIT PROCEDURES 2. Communicating with the
1. Inspection
predecessor auditor
2. Observation  Incoming auditor’s inquiry from
3. Inquiry predecessor would include:

o The predecessor auditor’s
understanding as to the reasons for
the change of auditors
o Any disagreement between the
predecessor auditor and client
o Any facts that might have a bearing
on the integrity of the prospective
client’s management
ENGAGEMENT LETTER
 To express an opinion on the fs
 Management’s responsibility for
the fair presentation of the fs
 Scope of audit
 Forms or any reports or other
communication that the auditor
expects to issue
 The fact that because of the
limitations of the audit, there is
an unavoidable risk that material
misstatements may remain
undiscovered
 The responsibility of the client to
allow the auditor to have
unrestricted access to whatever
records, documentation and
other information requested in
connection with the audit
Importance of the engagement letter
 Avoid misunderstandings with
respect to the engagement
 Document and confirm the
auditor’s acceptance of the
appointment
The auditor does not normally send
new engagement letter every year,
but these following factors may have
caused the auditor to send a new
engagement letter:
 Any indication that the client
misunderstands the objective
and scope of the audit
 Any revised or special terms of
the engagement
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 A recent change of senior
management, board of directors
or ownership
 A significant change in the
nature or size of the client’s
business
 Legal requirements and other
government agencies
pronouncements
AUDIT PLANNING
Audit planning involves developing a
general audit strategy and a detailed
approach for the expected conduct of
the audit.
Auditor’s main objective: to
determine the scope of audit
procedures to be performed
The extent of planning will vary
according to:
a. The size of the entity
b. The complexity of the audit
c. The auditor’s experience with
the entity, and knowledge of the
business
Importance of Adequate Planning of
the Audit Work
 Planning helps ensure the
appropriate attention is devoted
to important areas of the audit
 It helps identify potential
problems
 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
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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,
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
Using Materiality Levels
 Determine the overall
materiality – FS level
 Determine the tolerable
misstatement – Account Balance
level
 Compare the aggregate amount
of uncorrected misstatement
with the overall materiality
AUDIT RISK MODEL
Audit risk = Inherent risk x Control risk
x Detection risk
Steps in Using the Audit risk Model
 Set the desired level of audit risk
 Assess the level of inherent risk
 Assess the level of control risk
 Determine the acceptable level
of detection risk
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 Design substantive test
Effect of materiality on audit risk and
planned audit procedures
- There is an inverse relationship
between materiality and the
level of audit risk, that is, the
higher the materiality level, the
lower the audit risk and vice
versa.
RISK ASSESSMENT PROCEDURES
These are procedures performed by
auditors to obtain an understanding
of the entity and its environment
including its internal control and to
assess the risk of material
misstatements in the fs. These
include:
 Inquiries of mgt and others
within the entity
 Analytical procedures; and
 Observation and inspection
ANALYTICAL PROCEDURES
Analytical procedures involve analysis
of significant ratios and trends,
including the resulting investigation of
the fluctuation and relationships that
are inconsistent with other relevant
information or deviate from predicted
amounts
STEPS IN APPLYING ANALYTICAL
PROCEDURES
PSA 520 requires the auditor to use
analytical procedures in the planning
and overall review stages of the audit.
STEP 1: Develop expectations
regarding fs using:
 Prior year’s fs
 Page |9

 Anticipated results such as of the audit. The overall audit

budgets or forecasts plan sets out in broad terms the
 Industry averages nature, timing and extent of the
 Non-financial information audit procedures to be
 Typical relationships among fs performed.
account balances Audit program
STEP 2: Compare the expectations  The auditor should develop and
with the fs under audit document an audit program
STEP 3: Investigate significant setting out the nature, timing
unexpected differences (unusual and extent of planned audit
fluctuations) to determine whether fs procedures required to
contain material misstatements. implement the overall audit plan.
In effect, audit program
THE USE OF ANALYTICAL executes the audit strategy. The
PROCEDURES audit program serves as a set of
Planning instructions to assistants
involved in the audit and as a
 To determine the nature, timing means to control and record the
and extent of the other auditing proper execution of the work
procedures  The form and content of the
o Understanding the client’s audit program may vary for each
business particular engagement but it
o Identify the areas should always include a detailed
representing specific risks. list of audit procedures that the
Substantive test auditor believes are necessary to
accomplish the audit objectives
 To obtain corroborative
evidence about particular Time budget
assertions related to account  A time budget is an estimate of
balance or transaction class the time that will be spent in
Completion phase executing the audit procedures
listed in the audit program. This
 As an overall review of the fs provides a basis for estimating
o To identify unusual audit fees and assists the auditor
fluctuations that were not in assessing the efficiency of the
identified in the planning assistants.
and testing phases of the
audit
o To confirm conclusions CONSIDERATION OF INTERNAL CONTR
reached with respect to INTERNAL CONTROL
the fairness of the fs
 Based on PSA 315, it is the
DOCUMENTING THE AUDIT PLAN process designed and effected
Audit plan by those charged with
governance, management, and
 An audit plan is an overview of other personnel to provide
the expected scope and conduct 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
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:
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 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
 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
P a g e | 11
 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.
P a g e | 12
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 (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, EVIDENC
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
 P a g e | 13

When intending to perform analytical AUDIT EVIDENCE

procedures as substantive tests, the
Evidence refers to the information
auditor should focus on those
obtained by the auditor in arriving at
accounts that are predictable. The
the conclusions on which the audit
following generalizations may be
opinion is based
helpful in assessing the predictability
of the accounts.  Underlying accounting data
refers to the accounting records
 IS are more predictable
underlying the fs. These include
compared to BS account.
books of accounts, related
 Accounts that are not subject to
accounting manuals, worksheet
management discretion are
supporting cost allocations and
generally predictable
reconciliations prepared by the
 Relationships in a stable
client personnel
environment are more
 Corroborating information
predictable than those in a
supporting the underlying
dynamic or unstable
accounting data obtained from
environment
client and other sources. This
includes documents such as
invoices, bank statements,
2. Test of details
purchase orders, contracts,
Test of details involves examining the checks and other information
actual detail making up the various obtained or developed by the
account balances. This approach may auditor through confirmation,
take the form of test of details of recalculation, observation, and
balances or test of details of reconciliation.
transactions.
QUALITIES OF EVIDENCE
 Test of details of balances
Sufficiency refers to the amount of
involves direct testing of ending
evidence that the auditor should
balance of an account
accumulate.
 Test of details of transactions
involves testing the transactions The following factors may be
which give rise to the ending considered in evaluating the
balance of an account sufficiency of evidence:
Effectiveness of substantive tests  The competence of evidence
 The materiality of the item
The potential effectiveness of the
being examined
auditor’s substantive test is affected
 The risk involved in a particular
by its nature, timing and extent
account
Nature – high or low quality of  Experience gained during
evidence to be gathered previous audit may indicate the
amount of evidence taken
Timing – substantive tests may
before and whether such
be performed at interim date or at
evidence was enough
year end
Extent – more or less extensive

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.
P a g e | 14
 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
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
P a g e | 15
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)
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

The only way to eliminate sampling
risk is to examine the entire
population but time and cost
constraints will prohibit the auditor in
doing so, instead, auditors control
sampling risk by
 Increasing the sample size; and
 Using an appropriate sample
selection method
Non-sampling risk, cannot be
eliminated even if the auditor
examines the entire population. The
risk, however, can be minimized by
 Proper planning; and
 Adequate direction, review and
supervision of the audit team
General Approaches to audit
sampling
There are two sampling approaches
that can be used by the auditor to
gather sufficient appropriate evidence:
a. Statistical sampling – is a
sampling approach that
 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:
P a g e | 16
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
b. Variable sampling
 A sampling plan used to
estimate a numerical
measurement of a population
such as peso value
 Generally used in performing
substantive tests to estimate the
amount of misstatements in the
fs
Basic steps in auditing
Audit procedures carried out by
means of sampling techniques require
consideration of at least the following
basic steps:
1. Define the objective of the test
2. Determine the audit procedure
to be performed
3. Determine the sample size
4. Select the sample
5. Apply the procedures
6. Evaluate the sample results
Sampling for test of controls
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.
 P a g e | 17

2. Tolerable deviation rate – the deviation rate, assess

maximum rate of deviations the control risk at a low
auditor is willing to accept, level, rely on internal
without modifying the planned control and perform less
degree of reliance on the extensive substantive
internal control. It has an tests.
inverse relationship with the 2. If the sampling deviation
sample size rate is barely lower than
3. Expected deviation rate – is the the tolerable deviation
rate of deviations the auditor rate:
expects to find in the population a. When using non-
before testing begins. It has a statistical sampling,
direct relationship with the assess control risk
sample size at a high level and
perform more
extensive
substantive tests.
PSA 530 has identified tree principal
b. When using
methods of selecting samples:
statistical sampling
1. Random number selection the auditor
2. Systematic selection determines the
3. Haphazard selection maximum
population
Other sampling applications for test
deviation rate by
of controls:
using a sampling
1. Sequential sampling (stop-or-go table or statistical
sampling) formula then
2. Discovery sampling compares vs. the
tolerable rate to
Evaluation of results
evaluate the sample
1. Determine the sample deviation results.
rate  If the maximum
2. Compare the deviation rate vs deviation rate
tolerable deviation rate and exceeds the
draw an overall conclusion tolerable rate,
about the population. the auditor will
a. If sample deviation rate > assess control
the tolerable rate, assess risk at a high
control risk at a high level level and
and perform more perform more
extensive substantive tests. extensive
b. If sample deviation rate < substantive
the tolerable rate, consider tests.
allowance for sampling risk:  If it does not
1. If the sampling deviation exceed, assess
rate is considerably control risk at a
lower than the tolerable low level, rely
 P a g e | 18

on internal Sample Selection Methods

control and
When selecting a sample for
perform less
substantive test, the auditor may use
extensive
anyone of the sample selection
substantive
methods mentioned in earlier. In
tests.
addition, he may use:
Sampling for Substantive Tests
1. Stratified sampling – the auditor
Factors in Determining the Sample may divide or stratified the
Size population into meaningful
groups in order to decrease the
1. Acceptable sampling risk – for
effect of the variance within the
practical purposes, auditor use
population and allows the
the acceptable level of detection
auditor to give more emphasis
risk as the acceptable sampling
to those items with higher
after giving adequate
monetary value.
consideration to the risk that
2. Value weighted selection – the
analytical procedures may fail to
probability of an item to be
detect material misstatement in
selected in this method of
account balance. It has an
selection is directly proportional
inverse relationship with the
to the monetary value of such
sample size.
item.
2. Tolerable misstatement – the
maximum amount of Evaluation of results
misstatement that the auditor
1. Project the misstatements to
will permit in the population and
the population
still be willing to conclude that
Projecting misstatement can be
the account balance is fairly
accomplished using:
stated. It has an inverse
a. Ratio estimation – uses
relationship with the sample size.
the book values of the
3. Expected misstatement – the
population size and the
amount of misstatement that
sample size to project the
the auditor believes exists in the
misstatements
population. It has a direct
b. Difference estimation –
relationship with the sample size.
uses the number of
4. Variation in the population – In
customers to project
most cases, the peso amount,
misstatements to the
included in the population, tend
population
to vary significantly. When using
2. Compare the projected
statistical sampling, this
misstatement vs. the tolerable
variability is measured by the
misstatements and draw an
standard deviation. It has a
overall conclusion
direct relationship with the
a. If the projected
sample size. The auditor can
misstatement > tolerable
estimate the variation based on
misstatement, the auditor
the prior year’s tests results or
will conclude that the
pilot sample.
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
P a g e | 19
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
P a g e | 20
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 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
2. Systems development and
documentation controls
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
P a g e | 21
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:
 Key verification
 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
P a g e | 22
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
 P a g e | 23

correctly handle valid and invalid 1. Snapshots

conditions as they arise.
It involves taking a picture of
2. INTEGRATED TEST FACILITY (ITF) transaction as it flows through the
computer systems. Audit software
By using the method of processing
routines are embedded at different
test data simultaneously with
points in the processing logic to
client’s data, ITF provides
capture the images of the
assurance that the program tested
transaction as it progresses
by the auditor is the same program
through the various stages of
used by the client in processing
processing. Such a technique
transactions.
permits an auditor to track data
3. PARALLEL SIMULATION and evaluate the computer
processes applied to the data.
The simulated program is used to
reprocess transactions that were 2. Systems control audit review
previously processed by the client’s files (SCARF)
program. The auditor compares
This involves embedding audit
the results obtained from the
software modules within an
simulation with the client’s output
application system to provide
to be able to make inference about
continuous monitoring of the
the reliability of the client’s
systems transaction. The
program. Parallel simulation can
information is collected into a
be accomplished using:
special computer file that the
a. Generalized audit auditor can examine.
software
THE AUDITOR’S REPORT ON THE FS
Consist of generally available General purpose fs – FS prepared in
computer packages which accordance with a general purpose
have been designed to framework.
perform common audit tasks
General purpose framework – A
such as performing or
financial reporting framework
verifying calculations,
designed to meet the common
summarizing and totaling files,
financial information needs of a wide
and reporting in a format
range of users. The financial reporting
specified by the auditor.
framework may be a fair presentation
b. Purpose written programs framework or a compliance
framework.
These are designed to
perform audit tasks in specific Unmodified report (unqualified)
circumstances. These
The most common type of audit
programs may be developed
report contains a clear opinion or an
by the auditor, the entity
unmodified opinion. The unmodified
being audited or an outside
opinion may be issued only when the
programmer hired by the
following conditions have been met:
auditor.
CAATS for Advanced Computer
Systems
 P a g e | 24

 The fs are fairly stated in 3. Inappropriate or inadequate

accordance with applicable disclosure
Financial Reporting Framework.
SCOPE LIMITATION
 The audit was performed in
accordance with PSA. A limitation on the scope of the
auditor’s work may be imposed by the
BASIC ELEMENTS OF UNMODIFIED
client or imposed by circumstances:
REPORT
1. Circumstances beyond the
1. Title
control of the entity such as
2. Addressee
inadequacy of accounting
3. Auditor’s opinion
records
4. Basis for opinion
2. Circumstances relating to the
5. Material uncertainty related to
nature or timing of the auditor’s
going concern
work like when the auditor is
6. Key audit matters (if listed entity)
engaged only after client’s fiscal
7. Responsibilities for the fs
year ends.
8. Auditor’s responsibilities for the
3. Limitations imposed by
audit of the fs
management like when
9. Report on other legal and
management prevents the
regulatory requirements (if
auditor from requiring external
listed entity)
confirmation of specific accounts
10. Name of the engagement
partner MATERIALITY AND PERVASIVENESS
11. Signature of the auditor CONSIDERATION
12. Auditor’s Address
If the magnitude of misstatements is
13. Date of the Auditor’s
material enough to affect the readers
Report
of the fs, but not enough to
MODIFICATION TO THE OPINION overshadow the fair presentation
taken as a whole, the auditor would
1. Material Misstatements
most likely express a qualified opinion.
a. Material but not
On the other hand, if the auditor
pervasive – qualified
believes that the effect of the
b. Material and pervasive -
misstatements is highly material and
adverse
pervasive as to render the overall fs
2. Scope Limitations
misleading, the auditor would most
a. Material but not
likely express an adverse opinion.
pervasive – qualified
b. Material and pervasive – BASIS FOR MODIFICATION OF
disclaimer of opinion PARAGRAPH
MATERIAL MISSTATEMENT This paragraph should be placed
immediately before the opinion
A material misstatement of the fs may
paragraph with appropriate heading
arise from:
such as “Basis for qualified opinion”
1. Inappropriate accounting policy “Basis for Adverse opinion” or “Basis
selected for Disclaimer of opinion”
2. Misapplication of selected
1. Material misstatement
accounting policy; or

a. Description of the nature
of the misstatement or an
explanation of how the
disclosure is misstated
b. Quantification of the
financial effects of the
misstatements or
disclosure of omitted
information, if practicable.
2. Scope limitation
If the modification results from
an inability to obtain sufficient
appropriate audit evidence, the
basis of the modification
paragraph shall only explain the
reason for inability
EMPHASIS OF A MATTER
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 auditor’s judgment, is of such
importance that it is fundamental to
the reader’s understanding, the
auditor.
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
P a g e | 25
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’
a 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-ASSURA
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:
 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
P a g e | 26
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.
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)
P a g e | 27
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
P a g e | 28
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
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 TOPIC
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
P a g e | 29
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
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
P a g e | 30
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:
 The objectives and scope of the
expert’s work
 Methods and assumptions to be
used by the expert
 The intended use by the auditor
of the expert’s work
 Form and content of the
expert’s report
 Expert’s relationship to the
client
3. Assessing the work of the expert
 The auditor should assess the
appropriateness of the expert’s
work as audit evidence
regarding the financial
statement assertion being
considered
 If the results of the expert’s
work do not provide sufficient
appropriate evidence or the
results are not consistent with
other evidence, the auditor
should resolve the matter by
discussing it with the client and
the expert or performing
additional procedures, including
possibly engaging the services of
another expert
 P a g e | 31

CONSIDERING THE WORK OF Audit planning

INTERNAL AUDITING Consideration of internal control
Audit objectives, procedures, evidence a
Internal auditing is an appraisal
documentation
activity established within an entity as
Audit sampling & Completing the audit a
a service to the entity. Considering
post-audit responsibilities
the work of internal auditor involves
two important phases: Auditing in CIS environment
Other assurance and non-assurance servic
1. Making a preliminary Special and other related topics
assessment of internal auditing Code of Ethics (pdf)
For this purpose, the external RA 9298 (pdf)
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 in performing
routine or mechanical audit
procedures. This is an acceptable
practice provided the external
auditor supervises and review the
work performed by the internal
auditors
Audit – an overview
Professional standards
Auditor’s responsibilities
Audit process
Accepting an engagement