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1.5. PSA 200 Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with PSAs..............................................10
1.6. PSQC 1 Quality Control for Firms that Perform Audits and Reviews
of Financial Statements, and Other Assurance and Related Services
Engagements............................................................................................................... 13
YES
Perform tests of controls
LowMediumHigh or Unknown
Evaluate results
PHASE II
Perform tests of controls and substantive tests of transactions
PHASE III
Perform analytical procedures and tests of details of balances
PHASE IV
Complete the audit and issue an audit report
AUDMOD1.1 NATURE OF AUDITING
Auditingis the accumulation and evaluation of evidence about information to determine and report on the
degree of correspondence between the information and established criteria. Auditing should be done by a
competent, independent person.
Information and Established Criteria Accumulating and Evaluating Evidence
To do an audit, there must be information Evidence is any information used by the auditor to
in a verifiable formand some standards determine whether the information being audited is
(criteria) by which the auditor can evaluate stated in accordance with the established criteria.
the information. Evidence takes many different forms, including:
Examples of quantifiable information: 1. Electronic and documentary data about transactions
1. companies’ financial statements 2. Written and electronic communication with outsiders
2. individuals’ federal income tax returns. 3. Observations by the auditor
Examples of subjective information: 4. Oral testimony of the auditee (client)
1. effectiveness of computer systems To satisfy the purpose of the audit, auditors must obtain
2. efficiency of manufacturing operations. a sufficient quality and volume of evidence. Auditors
Examples of criteria: must determine the types and amount of evidence
1. IFRS necessary and evaluate whether the information
2. US GAAP corresponds to the established criteria.
3. COSO Internal Control – Integrated The auditor must be qualified to understand the criteria
Framework used and must be competent to know the types and
4. Internal Revenue Code amount of evidence to accumulate to reach the proper
For more subjective information, it is more conclusion after examining the evidence. The auditor
difficult to establish criteria. Typically, must also have an independent mental attitude. The
auditors and the entities being audited agree competence of those performing the audit is of little value
on the criteria well before the audit starts. if they are biased in the accumulation and evaluation of
evidence.
Distinction between Auditing and Accounting
Accounting is the recording, classifying, and summarizing of economic events in a logical manner for the
purpose of providing financial information for decision making. To provide relevant information,
accountants must have a thorough understanding of the principles and rules that provide the basis for
preparing the accounting information. In addition, accountants must develop a system to make sure that
the entity’s economic events are properly recorded on a timely basis and at a reasonable cost.
When auditing accounting data, auditors focus on determining whether recorded information properly
reflects the economic events that occurred during the accounting period. Because U.S. or international
accounting standards provide the criteria for evaluating whether the accounting information is properly
recorded, auditors must thoroughly understand those accounting standards.
In addition to understanding accounting, the auditor must possess expertise in theaccumulation and
interpretation of audit evidence. It is this expertise that distinguishesauditors from accountants.
Determining the proper audit procedures, deciding the number and types of items to test and evaluating
the results are unique to the auditor.
Economic Demand for Auditing
As society becomes more complex, decision makers are more likely to receive unreliable
information.Information risk reflects the possibility that the information upon which the business risk
decision was made was inaccurate. The following are the causes of information risk:
1. Remoteness of Information – When information is obtained from others, the likelihood of it being
intentionally or unintentionally misstated increases.
2. Biases and Motives of the Provider – If information is provided by someone whose goals are
inconsistent with those of the decision maker, the information may be biased in favor of the provider.
3. Voluminous Data – As organizations become larger, so does the volume of theirexchange transactions.
This increases the likelihood that improperly recorded information is included in the records—perhaps
buried in a large amount of other information.
4. Complex Exchange Transactions - In the past few decades, exchange transactions between
organizations have become increasingly complex and therefore more difficult to record properly.
The following are the ways to reduce information risk:
1. User verifies information – The user may go to the business premises to examine records and obtain
information about the reliability of the statements. Normally, this is impractical because of cost.
2. User shares information risk with management – There is considerable legal precedent indicating
that management is responsible for providing reliableinformation to users. A difficulty with sharing
information risk with management is that users may not be able to collect on losses.
3. Audited financial statements are provided – The most common way for users to obtain reliable
information is to have an independent audit. Typically, management of a private company or the audit
committee for a public company engages the auditor to provide assurances to users that the financial
statements are reliable.Decision makers can then use the audited information on the assumption that it
is reasonably complete, accurate, and unbiased.They value the auditor’s assurance because of the
auditor’s independence from the client and knowledge of financial statement reporting matters.
Whenever there is a PICPA representative to the International Auditing and Assurance Standards Board
(the then International Auditing Practices Committee), such PICPA representative becomes an ex-officio
member of the Council.
The Council members from PICPA represent the following sectors (one representative each):
Academe
Commerce and Industry
Public Practice – one from Luzon, one from Visayas, one from Mindanao
The Authority Attaching to Philippine Standards Issued by the AASC
Pronouncements on generally accepted auditing standards, interpretations, and opinions issued by the
AASC apply whenever an independent examination of financial statements of any entity, whether
profit-oriented or not, and irrespective of size or legal form, when such examination is conducted for the
purpose of expressing an opinion thereon. They may also have application, as appropriate, to other
related activities of auditors.
Standards Application
Philippine Standards on Auditing audit of historical financial information
Philippine Standards on Review review of historical financial information
Engagements (PSREs)
Philippine Standards on Assurance assurance engagements dealing with subject matters other
Engagements (PSAEs) than historical financial information
Philippine Standards on Related Services compilation engagements, engagements to apply agreed-
(PSRSs) upon procedures to information and other related services
engagements as specified by the AASC
PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the ASPC’s Engagement Standards.
Philippine Standards on Quality Control (PSQCs) are to be applied for all services falling under the ASPC’s
Engagement Standards.
Philippine Standards are to be applied as written to engagements in public sector, unless so stated that they
do not apply in a public sector environment or they are not appropriate in such an environment.
The Authority Attaching to Practice Statements Issued by the AASC
Philippine Auditing Practice Statements (PAPSs) are issued to provide interpretive guidance and practical
assistance to professional accountants in implementing PSAs and to promote good practice.
Philippine Review Engagement Practice Statements (PREPSs), Philippine Assurance Engagement Practice
Statements (PAEPSs), and Philippine Related Services Practice Statements (PRSPSs) are issued to serve the
same purpose for implementation of PSREs, PSAEs and PSRSs, respectively.
Introduction
This Framework defines and describes the elements and objectives of an assurance engagement, and
identifies engagements to which Philippine Standards on Auditing (PSAs), Philippine Standards on Review
Engagements (PSREs) and Philippine Standards on Assurance Engagements (PSAEs) apply.
It provides a frame of reference for:
a. Professional accountants in public practice (“practitioners”) when performing assurance
engagements. Professional accountants in the public sector refer to the Public Sector Perspective at
the end of the Framework. Professional accountants who are neither in public practice nor in the
public sector are encouraged to consider the Framework when performing assurance
engagements;
b. Others involved with assurance engagements, including the intended users of an assurance
report and the responsible party; and
c. The International Auditing and Assurance Standards Board (IAASB) in its development of
ISAs, ISREs and ISAEs and, consequently, the Auditing and Assurance Standards Council (AASC)
in its adoption of said standards for application in the Philippines.
This Framework does not itself establish standards or provide procedural requirements for the
performance of assurance engagements.
In addition to this Framework and PSAs, PSREs and PSAEs, practitioners who perform assurance
engagements are governed by:
a. The Code of Ethics for Professional Accountants in the Philippines (the Philippine Code),
which is adopted from the IFAC Code of Ethics forProfessional Accountants, which establishes
fundamental ethical principles for professional accountants; and
b. Philippine Standards on Quality Control (PSQCs), which are adopted from the International
Standards on Quality Control, which establish standards and provide guidance on a firm’s system
of quality control.
Part A of the Code sets out the fundamental ethical principles that all professional accountants are required
to observe, including:
a. Integrity;
b. Objectivity;
c. Professional competence and due care;
d. Confidentiality; and
e. Professional behavior
Part B of the Code, which applies only to professional accountants in public practice (“practitioners”),
includes a conceptual approach to independence that takes into account, for each assurance engagement,
threats to independence, accepted safeguards and the public interest. It requires firms and members of
assurance teams to identify and evaluate circumstances and relationships that create threats to
independence and to take appropriate action to eliminate these threats or to reduce them to an acceptable
level by the application of safeguards.
Definition and Objective of an Assurance Engagement
Assurance engagement means an engagement in which a practitioner expresses a conclusion designed to
enhance the degree of confidence of the intended users other than the responsible party about the outcome
of the evaluation or measurement of a subject matter against criteria.
Subject matter information refers to the outcome of the evaluation or measurement of a subject
matterthat results from applying the criteria to the subject matter. For example:
The recognition, measurement, presentation and disclosure represented in the financial statements
(outcome) result from applying a financial reporting framework for recognition, measurement,
presentation and disclosure, such asPhilippine Financial Reporting Standards, (criteria) to an entity’s
financial position, financial performance and cash flows (subject matter).
An assertion about the effectiveness of internal control (outcome) results from applying a framework
for evaluating the effectiveness of internal control, such as COSO or CoCo (criteria) to internal control, a
process (subject matter).
Subject matter information can fail to be properly expressed in the context of the subject matter and the
criteria, and can therefore be misstated, potentially to a material extent.
Assertion-based engagements – the evaluation or measurement of the subject matter is performed by the
responsible party, and the subject matter information is in the form of an assertion by the responsible party
that is made available to the intended users.
Direct reporting engagements – the practitioner either directly performs the evaluation or measurement
of the subject matter, or obtains a representation from the responsible party that has performed the
evaluation or measurement that is not available to the intended users. The subject matter information is
provided to the intended users in the assurance report.
Two types of assurance engagements
Reasonable assurance engagement– objective is a reduction in assurance engagement risk to an
acceptably low level in the circumstances of the engagement as the basis for a positive form of expression of
Introduction
The AASChas been authorized to issue Philippine Standards on Auditing (PSAs). The purpose of this
document is to describe the framework within which PSAs are issued in relation to the services which may
be performed by auditors.
For ease of reference, except where indicated, the term “auditor” is used throughout the PSAs when
describing both auditing and related services which may be performed. Such reference is not intended to
imply that a person performing related services need be the auditor of the entity's financial statements..
Financial Reporting Framework
Financial statements are ordinarily prepared and presented annually and are directed toward the common
information needs of a wide range of users. Many of those users rely on the financial statements as their
major source of information because they do not have the power to obtain additional information to meet
their specific information needs. Thus, financial statements need to be prepared in accordance with one, or
a combination of:
a. accounting standards generally accepted in the Philippines;
b. International Accounting Standards; and
Introduction
Scope of this PSA
This PSA deals with the independent auditor’s overall responsibilities when conducting an audit of financial
statements in accordance with PSAs. Specifically, it sets out the overall objectives of the independent
auditor, and explains the nature and scope of an audit designed to enable the independent auditor
to meet those objectives.
It also explains the scope, authority and structure of the PSAs, and includes requirements establishing the
general responsibilities of the independent auditor applicable in all audits, including the obligation to
comply with the PSAs. The independent auditor is referred to as “the auditor” hereafter.
An audit of financial statements
The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements.
This is achieved by the expression of an opinion by the auditor on whether the financial statements are
prepared, in all material respects, in accordance with an applicable financial reporting framework.
The financial statements subject to audit are those of the entity, prepared by management of the entity with
oversight from those charged with governance. PSAs do not impose responsibilities on management or
those charged with governance and do not override laws and regulations that govern their
responsibilities.
However, an audit in accordance with PSAs is conducted on the premise that management and, where
appropriate, those charged with governance have acknowledged certain responsibilities that are
fundamental to the conduct of the audit. The audit of the financial statements does not relieve management
or those charged with governance of their responsibilities.
As the basis for the auditor’s opinion, PSAs require the auditor to obtain reasonable assurance about
whether the financial statements as a whole are free from material misstatement, whether due to
fraud or error.
Reasonable assurance is a high level of assurance. It is obtained when the auditor has obtained sufficient
appropriate audit evidence to reduce audit risk (that is, the risk that the auditor expresses an inappropriate
opinion when the financial statements are materially misstated) to an acceptably low level.
The concept of materiality is applied by the auditor both in planning and performing the audit, and
in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements,
if any, on the financial statements.
In general, misstatements, including omissions, are considered to be material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the
basis of the financial statements.
Judgments about materiality are made in the light of surrounding circumstances, and are affected by the
auditor’s perception of the financial information needs of users of the financial statements, and by
the size or nature of a misstatement, or a combination of both. The auditor’s opinion deals with the
financial statements as a whole and therefore the auditor is not responsible for the detection of
misstatements that are not material to the financial statements as a whole.
The PSAs require that the auditor exercise professional judgment and maintain professional
skepticism throughout the planning and performance of the audit and, among other things:
Identify and assess risks of material misstatement, whether due to fraud or error, based on an
understanding of the entity and its environment, including the entity’s internal control.
Introduction
Scope of this PSQC
This PSQCdeals with a firm’s responsibilities for its system of quality control for audits and reviews
of financial statements, and other assurance and related services engagements. This PSQC is to be
read in conjunction with relevant ethical requirements.
This PSQC applies to all firms of professional accountants in respect of audits and reviews of financial
statements, and other assurance and related services engagements. The nature and extent of the policies
and procedures developed by an individual firm to comply with this PSQC will depend on various factors
such as the size and operating characteristics of the firm, and whether it is part of a network.
Objective
The objective of the firm is to establish and maintain a system of quality control to provide it with
reasonable assurance that:
a. The firm and its personnel comply with professional standards and applicable legal and regulatory
requirements; and
b. Reports issued by the firm or engagement partners are appropriate in the circumstances.
Elements of a System of Quality Control
The firm shall establish and maintain a system of quality control that includes policies and procedures that
address each of the following elements:
a. Leadership responsibilities for quality within the firm
b. Relevant ethical requirements
c. Acceptance and continuance of client relationships and specific engagements
d. Human resources
e. Engagement performance
f. Monitoring
The firm shall document its policies and procedures and communicate them to the firm’s personnel.
Leadership Responsibilities for Quality within the Firm
The firm shall establish policies and procedures designed to promote an internal culture recognizing that
quality is essential in performing engagements. Such policies and procedures shall require the firm’s chief
executive officer (or equivalent) or, if appropriate, the firm’s managing board of partners (or equivalent) to
assume ultimate responsibility for the firm’s system of quality control.
Relevant ethical requirements
The firm shall establish policies and procedures designed to provide it with reasonable assurance that the
firm and its personnel comply with relevant ethical requirements.
Acceptance and Continuance of Client Relationships and Specific Engagements
The firm shall establish policies and procedures for the acceptance and continuance of client relationships
and specific engagements, designed to provide the firm with reasonable assurance that it will only
undertake or continue relationships and engagements where the firm:
Is competent to perform the engagement and has the capabilities, including time and resources, to do so;
Can comply with relevant ethical requirements; and
Has considered the integrity of the client, and does not have information that would lead it to conclude
that the client lacks integrity.
Human Resources
The firm shall establish policies and procedures designed to provide it with reasonable assurance that it
has sufficient personnel with the competence, capabilities, and commitment to ethical principles necessary
to:
a. Perform engagements in accordance with professional standards and applicable legal and
regulatory requirements; and
b. Enable the firm or engagement partners to issue reports that are appropriate in the circumstances.
Engagement Performance
The firm shall establish policies and procedures designed to provide it with reasonable assurance that
engagements are performed in accordance with professional standards and applicable legal and regulatory
requirements, and that the firm or the engagement partner issue reports that are appropriate in the
circumstances. Such policies and procedures shall include:
a. Matters relevant to promoting consistency in the quality of engagement performance;
b. Supervision responsibilities; and
c. Review responsibilities.
The firm’s review responsibility policies and procedures shall be determined on the basis that work of less
experienced team members is reviewed by more experienced engagement team members.
Monitoring
The firm shall establish a monitoring process designed to provide it with reasonable assurance that the
policies and procedures relating to the system of quality control are relevant, adequate, and operating
Introduction
Scope of this PSA
This PSAdeals with the specific responsibilities of the auditor regarding quality control procedures
for an audit of financial statements. It also addresses, where applicable, the responsibilities of the
engagement quality control reviewer. This PSA is to be read in conjunction with relevant ethical
requirements.
System of Quality Control and Role of Engagement Teams
Quality control systems, policies and procedures are the responsibility of the audit firm. Under ISQC 1, the
firm has an obligation to establish and maintain a system of quality control to provide it with reasonable
assurance that:
a. The firm and its personnel comply with professional standards and applicable legal and regulatory
requirements; and
b. Reports issued by the firm or engagement partners are appropriate in the circumstances.
Engagement teams are entitled to rely on the firm’s system of quality control, unless information provided
by the firm or other parties suggests otherwise.
Requirements
Leadership Responsibilities for Quality on Audits
The engagement partner shall take responsibility for the overall quality on each audit engagement to which
that partner is assigned.
Relevant Ethical Requirements
Throughout the audit engagement, the engagement partner shall remain alert, through observation and
making inquiries as necessary, for evidence of non-compliance with relevant ethical requirements by
members of the engagement team.
If matters come to the engagement partner’s attention through the firm’s system of quality control or
otherwise that indicate that members of the engagement team have not complied with relevant ethical
requirements, the engagement partner, in consultation with others in the firm, shall determine the
appropriate action.
Acceptance and Continuance of Client Relationships and Audit Engagements
The engagement partner shall be satisfied that appropriate procedures regarding the acceptance and
continuance of client relationships and audit engagements have been followed, and shall determine that
conclusions reached in this regard are appropriate.
If the engagement partner obtains information that would have caused the firm to decline the audit
engagement had that information been available earlier, the engagement partner shall communicate that
information promptly to the firm, so that the firm and the engagement partner can take the necessary
action.
Human Resources
The engagement partner shall be satisfied that the engagement team, and any auditor’s experts who are not
part of the engagement team, collectively have the appropriate competence and capabilities to:
a. Perform the audit engagement in accordance with professional standards and applicable legal and
regulatory requirements; and
b. Enable an auditor’s report that is appropriate in the circumstances to be issued.
Engagement Performance
Direction, Supervision and Performance
The engagement partner shall take responsibility for:
a. The direction, supervision and performance of the audit engagement in compliance with professional
standards and applicable legal and regulatory requirements; and
Introduction
Scope of this PSA
This PSA deals with the auditor’s responsibilities in agreeing the terms of the audit engagement with
management and, where appropriate, those charged with governance. This includes establishing that
certain preconditions for an audit, responsibility for which rests with management and, where appropriate,
those charged with governance, are present. PSA 220 deals with those aspects of engagement acceptance
that are within the control of the auditor.
Objective
The objective of the auditor is to accept or continue an audit engagement only when the basis upon
which it is to be performed has been agreed, through: