Professional Documents
Culture Documents
Auditing
Theory
AUDITING THEORY
CPA REVIEW
1. PSAs, PSREs, PSAEs and PSRSs are collectively referred to as the AASCs Engagement Standards.
2. Philippine standards on Quality Control (PSQC) are to be applied for all services falling under the
AASCs engagement standards.
3. Philippine Standards are applicable to engagements in the Public sector.
The Authority Attaching to Practice Statements Issued by the AASC
1. Philippine Practice Statements are issued to:
Provide interpretive guidance and practical assistance o professional accountants in
implementing Philippine Standards; and
Promote good practice
2. Professional accountants should be aware of and consider Practice Statements applicable to the
engagement.
3. A professional accountant who does not consider and apply the guidance included in a relevant
Practice Statements should be prepared to explain how the basic principles and essential
procedures in the AASCs Engagement Standard(s) addressed by the Practice Statement have
been complied with.
PHILIPPINE FRAMEWORK FOR ASSURANCE ENGAGEMENTS
1. The Framework does not itself establish standards or provide procedural requirements for the
performance of assurance engagements.
2. In addition to the Framework and PSAs, PSREs and PSAEs, practitioners who perform assurance
engagements are governed by:
The Philippine Code of Ethics for Professional Accountants; and
Philippine Standards on Quality Control (PSQCs)
ASSURANCE ENGAGEMENTS
1. Assurance engagement means an agreement in which a particular 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.
2. Subject matter information refers to the outcome of the evaluation or measurement of a
subject matter.
3. In some assurance engagements, the evaluation or measurement of the subject I 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 intended users (assertion-based engagements).
4. In other assurance engagements, the practitioner either directly performs the evaluation or
measurement of the subject matter, or obtains a representation from the responsible party that
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has performed the evaluation or measurement that is not available to the intended users in the
assurance report (direct reporting engagements)
TWO TYPES OF ASSURANCE ENGAGEMENT
1. Reasonable assurance engagement the 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 the practitioners conclusion.
2. Limited assurance engagement the objective is a reduction in assurance engagement risk to a
level that is acceptable in the circumstances of the engagement, but where the risk is greater
than for a reasonable assurance engagement, as a basis for a negative form of expression of the
practitioners conclusion.
SCOPE OF THE FRAMEWORK
The following are non-assurance engagements and therefore are not covered by the Framework:
1. Engagements covered by the PSRSs such as agreed-upon procedures engagements and
compilations of financial or other information.
2. The preparation of tax returns where no conclusion conveying assurance is expressed.
3. Consulting (or advisory) engagements, such as management and tax consulting.
ELEMENTS OF AN ASSUARANCE ENGAGEMENT
1. A three-party relationship involving:
A practitioner;
A responsible party; and
Intended users.
2. An appropriate subject matter;
3. Suitable criteria;
4. Sufficient appropriate evidence; and
5. A written assurance report in the form appropriate to a reasonable assurance engagement or a
limited assurance engagement.
Audit
High, but not
absolute
assurance
Positive assurance
on assertion(s)
(Audit Report)
Review
Moderate
assurance
Negative
assurance on
assertion(s)
(Review Report)
Agreed-upon
Procedures
No assurance
Factual findings of
procedures
Compilation
No assurance
Identification of
information
compiled
(Compilation
Report)
AUDITING THEORY
CPA REVIEW
PSQC1 QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND REVIEWS OF HISTORICAL
FINANCIAL INFORMATION, AND OTHER ASSURANCE AND RELATED SERVICES
PSA 220 (REVISED)
QUALITY CONTROL FOR AUDITS OF HISTORICAL FINANCIAL INFORMATION
PSA 210 [AMENDED BY PSA 700(REVISED)]
TERMS OF AUDIT ENGAGEMENTS
PSQC 1
1. The firm should establish a System of Quality Control to provide it with reasonable assurance
that:
a. The firm and its personnel comply with professional standards and regulatory and
legal requirements; and
b. The reports issued by the firm or engagement partners are appropriate in the
circumstances.
2. Elements of a System of Quality Control
a. Leadership responsibility for quality within the firm
b. Ethical requirements
c. Acceptance and continuance of client relationships and specific engagements.
d. Human resources
e. Engagement performance
f. Monitoring
PSA 220 (Revised)
1. The engagement team should implement quality control procedures that are applicable to the
individual audit engagement.
2. The engagement partner should
a. Take responsibility for the overall quality on each audit engagement to which that
partner is assigned.
b. Consider whether members of the engagement team have complied with ethical
requirements.
c. Be satisfied that appropriate procedures regarding the acceptance and continuance
of client relationships and specific audit engagements have been followed, and that
conclusions reached in this regard are appropriate and have been documented.
d. Be satisfied that the engagement team collectively has the appropriate capabilities,
competence and time to perform the audit engagement in accordance with
professional standards and regulatory and legal requirements, and to enable an
auditors report that is appropriate in the circumstances to be issued.
e. Take responsibility for the direction, supervision and performance of the audit
engagement in compliance with professional standards and regulatory and legal
requirements, and for the auditors report that is issued to be appropriate n he
circumstances.
f. Be satisfied that sufficient appropriate audit evidence has been obtained to support
the conclusions reached and for the auditors report to be issued.
PSA 210 [AMENDED BY THE PSA 700 (REVISED)]
1. The purpose of this standard is to establish standards and provide guidelines on:
a. Agreeing the terms of the engagement with the client; and
b. The auditors response to a request by a client to change the terms of an
engagement to one that provides a lower level of assurance.
2. Audit Engagement Letters
It is in the interest of both client and auditor that the auditor sends an engagement
letter, preferably before the commencement of the engagement, to help in avoiding
misunderstandings with respect to the engagement.
Principal Contents
An engagement letter would generally include reference to:
The objective of the audit of financial statements.
Managements responsibility for the financial statements.
The financial reporting framework adopted by management in
preparing the financial statements.
The scope of the audit, including reference to applicable
legislation, regulations or pronouncements of professional
bodies to which the auditor adheres.
The form of any reports or other communication of results of
the engagement.
The fact that because of the test nature and other inherent
limitations of an audit, together with the inherent limitations of
any accounting and internal controls system, there is an
unavoidable risk that even some material misstatement may
remain undiscovered.
Unrestricted access to whatever records, documentation and
other information requested in connection with the audit.
3. Acceptance of a Change in Engagement
1. An auditor who, before the completion of the engagement, is requested to change
the engagement tone which provides a lower level of assurance, should consider the
appropriateness of doing so.
2. A request from the client for the auditor to change the engagement may result
from:
a. A change in circumstances affecting the need for the service;
b. A misunderstanding as to the nature of an audit or related service originally
requested; or
c. A restriction on the scope of the engagement, whether imposed by
management or caused by circumstances.
(NOTE: A or B would ordinarily be a reasonable basis for requesting a
change in the engagement)
3. A change would not be considered reasonable if it appeared that the change relates
to information that is incorrect, incomplete or otherwise unsatisfactory.
4. Before agreeing to change an audit engagement to a related service, an auditor
would also consider any legal or contractual implications of the change.
5. If the auditor concludes that there is reasonable justification to change the
engagement and if the audit work performed complies with the PSAs applicable to
the change engagement, the report issued would be that appropriate for the revised
terms of the engagement.
6. In order to avoid confusing the reader, the report would not include reference to:
a. The original engagement; or
b. Any procedures that may have been performed by the original engagement,
except where the engagement is changed to undertake agreed-upon
procedures.
7. Where the terms of the engagement are changed, the auditor and the client should
agree in the new terms.
8. The auditor should not agree to a change of engagement where there is no
reasonable justification for doing so.
9. If the auditor is unable to agree to a change of engagement and is not permitted to
continue the original engagement, the auditor should withdraw and consider
whether there is any obligation, contractual or otherwise, to report to other parties,
such as the board of directors or shareholders, the circumstances necessitating the
withdrawal.
AUDITING THEORY
CPA REVIEW
The auditor should perform the following activities at the beginning of the current audit
engagement:
Perform procedures regarding the continuance of the client relationship and the specific
audit engagement.
Evaluate compliance with ethical requirements, including independence.
Establish an understanding of the terms of the engagement.
Planning Activities
3.
The auditor should establish the overall audit strategy for the audit. The overall audit strategy sets
the scope, timing and direction of the audit, and guides the development of the more detailed
audit plan
4.
5.
The auditor should develop an audit plan for the audit in order to reduce audit risk to an
acceptably low level.
The audit plan is more detailed than the overall audit strategy and includes the nature, timing and
extent of audit procedures to be performed by engagement team members in order to obtain
sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.
6.
7.
The auditor should plan the nature, timing and extent of direction and supervision of engagement
team members and review their work.
2.
The nature, timing and extent of the direction and supervision of engagement team members and
review of their work vary depending on many factors, including:
3.
The auditor plans the nature, timing and extent of direction and supervision of engagement team
members based on the assessed risk of material misstatement.
Documentation
The auditor should document the overall audit strategy and the audit plan, including any significant
changes made during the audit engagement.
Communications with Those Charged with Governance and Management
1.
The auditor may discuss elements of planning with those charged with governance and the entitys
management.
2.
Discussions with those charged with governance ordinarily include the overall audit strategy and
timing of the audit, including any limitations thereon, or any additional requirements.
3.
When discussion of matters included in the overall audit strategy or audit plan occur, care is
required in order not to compromise the effectiveness of the audit.
Perform procedures regarding the acceptance of the client relationship and the specific audit
engagement.
2.
Communicate with the previous auditor, where there has been a change of auditors, in compliance
with relevant ethical requirements.
PSA 315
UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISKS OF MATERIAL
MISSTATEMENT
1.
The auditor should obtain an understanding of the entity and its environment, including its internal
control, sufficient to identify and assess the risks of material misstatement of the financial
statements whether due to fraud or error, and sufficient to design and perform further audit
procedures.
2.
The auditor should perform the following risk assessment procedures to obtain an understanding
of the entity and its environment, including its internal control:
a.) Industry, regulatory, and other external factors, including the applicable financial reporting
framework.
b.) Nature of the entity, including the entitys selection and application of accounting policies.
c.) Objectives and strategies and the related business risks that may result in a material
misstatement of the financial statements.
d.) Measurement and review of the entitys financial performance.
e.) Internal control.
INTERNAL CONTROL
1.
Internal control is the process designed and effected by those charged with governance,
management, and other personnel to provide reasonable assurance about the achievement of the
entitys objectives with regard to:
Reliability of financial reporting;
Effectiveness and efficiency of operations; and
Compliance with applicable laws and regulations.
2.
3.
The classes of transactions in the entitys operations that is significant to the financial
statements.
The procedures, within both IT and manual systems, by which those transactions are
initiated, recorded, processed and reported in the financial statements.
The related accounting records, whether electronic or manual, supporting information, and
specific accounts in the financial statements, in respect of initiating, recording, processing
and reporting transactions.
How the information system captures events and conditions, other than classes of
transactions that are significant to the financial statements.
The financial reporting process used to prepare the entitys financial statements, including
significant accounting estimates and disclosures.
Control activities are the policies and procedures to help ensure that management directives are
carried out. Examples of control activities include those relating to the following:
Authorization
Performance reviews.
Information processing.
Physical controls.
Segregation of duties.
Monitoring of controls involves assessing the design and operation of controls on a timely basis
and taking the necessary corrective actions modified for changes in conditions.
4.
The auditor should identify and assess the risks of material misstatement at the financial
statements level, and at the assertion level for classes of transactions, account balances, and
disclosures.
2.
The auditor:
Identifies risks throughout the process of obtaining an understanding of the entity and its
environment, including relevant controls that relate to the risks, and by considering the
classes of transactions, account balances, and disclosures in the financial statements;
Relates the identified risks to what can go wrong at the assertion level;
Considers whether the risks are of a magnitude that could result in a material
misstatement of the financial statements; and
Considers the likelihood that the risks could result in a material misstatement of the
financial statements.
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AUDITING THEORY
CPA REVIEW
PSA 330
THE AUDITORS PROCEDURES IN REPONSE TO ASSESSED RISKS
Overall responses
1. The auditor should determine overall responses to address the risks of material misstatement at
the financial statement level. Such responses may include:
Emphasizing to the audit team the need to maintain professional skepticism n
gathering and evaluating audit evidence
Assigning more experienced staff or those with special skills or using experts
Providing more supervision
Incorporating additional elements of unpredictability in the selection of further
audit procedures to be performed
Making general changes to the nature, timing or extent of audit procedures
Audit Procedures Responsive to Risks of Material Misstatement at the Assertion Level
1. In designing further audit procedures, the auditor considers the following:
The significance of the risk
The likelihood that the material misstatement will occur
The characteristics of the class transactions, account balance, or disclosure
involved.
The nature of the specific controls used by the entity and in particular whether
they are manual or automated
Whether the auditor expects to obtain audit evidence to determine if the
entitys controls are effective n preventing, or detecting and correcting, material
misstatements
2. Considering the nature, timing and extent of further audit procedures
The nature of further audit procedures refers to their:
a. Purpose- tests of controls or substantive procedures
b. Type - inspection, observation, inquiry, confirmation, recalculation,
reperformance, or analytical procedures.
Timing refers to when audit procedures are performed or the period or date to which the audit
evidence applies.
Extent includes the quantity of a specific audit procedure to be performed.
TESTS OF CONTROLS
1. The auditor is required to perform tests of controls when:
a. The auditors risk assessment includes an expectation of the operating effectiveness
of controls; or
b. When the substantive procedures alone do not provide sufficient appropriate audit
evidence at the assertion level
2. Tests of the operating effectiveness of controls are performed only on those controls that
the auditor has determined are suitably designed to prevent, or detect and correct, a
material misstatement in an assertion
3. Testing the operating effectiveness of controls includes obtaining evidence about:
a. How controls were applied at relevant times during the period under audit;
b. The consistency with which they were applied; and
c. By whom or by what means they were applied.
SUBSTANTIVE PROCEDURES
1. Substantive test procedures are performed in order to detect material misstatements at the
assertion level, and include:
Tests of details of classes of transactions, account balances, and disclosures; and
Substantive analytical procedures
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2. The auditors substantive procedures should include the following audit procedures related to
the financial statement closing process:
Agreeing or reconciling the financial statements with accounting records; and
Examining material journal entries and other adjustments made during the
course of preparing the financial statements
3. The auditor should perform audit procedures to evaluate whether the overall presentation of
the financial statements, including the related disclosures, are in accordance with the applicable
financial reporting framework.
Evaluating the sufficiency and appropriateness of audit evidence obtained
1. Based on the audit procedures performed and the audit evidence obtained, the auditor should
evaluate whether the assessments of the risks of material misstatement at the assertion level
remain appropriate.
2. The auditor should conclude whether the assessments of the risks of material misstatement in
the financial statements.
3. If the auditor has not obtained sufficient appropriate audit evidence as to a material financial
statement assertion, the auditor should attempt to obtain further audit evidence. If the auditor
is unable to obtain further audit evidence, the auditor should express a qualified opinion or a
disclaimer of opinion.
Documentation
1. The auditor should document:
The overall responses to address the assessed risks of material misstatement at
the financial statement level and the nature, timing, and extent of the further
audit procedures;
The linkage of those procedures with the assessed risks at the assertion level;
and
The results of the audit procedures
2. If the auditor plans to use audit evidence about the operating effectiveness of controls obtained
in prior audits, the auditor should document the conclusions reached with regard to relying on
vcfsuch controls that were tested in a prior audit.
3. The auditors documentation should demonstrate that the financial statements agree or
reconcile with the underlying accounting records.
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AUDITING THEORY
PSA 320
PSA 520
PSA 550
PSA 610
PSA 620
CPA REVIEW
PSA 320
AUDIT MATERIALITY
1. Materiality should be considered by the auditor when:
Determining the nature, timing and extent of audit procedures; and
Evaluating the effect of misstatements
2. There is an inverse relationship between materiality and the level of audit risk
3. In evaluating whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework, the auditor should assess whether
the aggregate of uncorrected misstatements that have been identified during the audit is
material.
4. If the auditor concludes that the aggregate of uncorrected misstatements may be material, the
auditor needs to consider:
Reducing audit risk by extending audit procedures; or
requesting management to adjust the financial statements for the
misstatements identified
5. If management refuses to adjust the financial statements and the results of extended audit
procedures do not enable the auditor to conclude that the aggregate of uncorrected
misstatements is not material, the auditor should consider the appropriate modification to the
auditors report.
6. If the auditor has identified a material misstatement resulting from error, the auditor should
communicate the misstatements to the appropriate level of management on a timely basis, and
consider the need to report it to those charged with governance.
PSA 520
ANALYTICAL PROCEDURES
1. Analytical procedures means the analysis of significant ratios and trends including the
resulting investigation of fluctuations and relationships that are inconsistent with other relevant
information or which deviate from predicted amounts.
2. Analytical procedures also include consideration of comparisons of the entitys financial
statements:
a. Comparable information for prior periods
b. Anticipated results of the entity, such as budgets or forecasts, or expectations of the
auditor, such as an estimation of depreciation
c. Similar industry information
3. Analytical procedures also include consideration of relationships:
a. Among elements of financial information that would be expected to conform to a
predictable patter based on the entitys experience, such as gross margin
percentages.
b. Between financial information and relevant no-financial information, such as payroll
costs to numbers and employees
4. The auditor should apply analytical procedures at the planning stage to assist in understanding
the business and in identifying areas of potential risk. Analytical procedures in planning the use
both financial and non-financial information.
5. The auditor should apply analytical procedures at or near the end of the audit when performing
an overall conclusion as to whether the financial statements as a whole are consistent with the
auditors knowledge of the business.
6. The application of analytical procedures is based on the expectation that relationships among
data exist and continue in the absence of known conditions to the contrary. The presence of
these relationships provides audit evidence as to the completeness, accuracy and validity of the
data produced by the accounting system
7. The extent of reliance that the auditor places on the results of analytical procedures depends on
the following factors:
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PSA 550
RELATED PARTIES
1. Management is responsible for the identification and disclosure of related parties and
transactions with such parties.
2. The auditor should perform audit procedures designed to obtain sufficient appropriate audit
evidence regarding the identification and disclosure by management of related parties and the
effect of related party transactions that are material to the financial statements. However, an
audit cannot be expected to detect all related party transactions.
3. The auditor needs to have a sufficient understanding of the entity and its environment to enable
identification of the events, transactions and practices that may result in a risk of material
misstatement regarding related parties and transactions with such parties.
4. When obtaining an understanding of the entitys internal control, the auditor should consider
the adequacy of control activities over the authorization and recording of related party
transactions.
5. In examining the identified related party transactions, the auditor should obtain sufficient
appropriate audit evidence as to whether these transactions have been properly recorded and
disclosed.
6. The auditor should obtain a written representation from management concerning:
a. The completeness of information provided regarding the identification of related
parties; and
b. The adequacy of related party disclosures in the financial statements
7. The auditor is unable to obtain sufficient appropriate audit evidence concerning related parties
and transactions with such parties or concludes that their disclosure in the financial statements
is not adequate; the auditor should modify the audit report appropriately.
PSA 610
CONSIDERING THE WORK OF INTERNAL AUDIT
1. The external auditor should obtain a sufficient understanding of internal audit activities to
identify and assess the risks of material misstatement of the financial statements and to design
and perform further audit procedures.
2. The external auditor should perform an assessment of the internal audit function when internal
auditing is relevant to the external auditors risk assessment.
3. When obtaining an understanding and performing a preliminary assessment of the internal
audit function, the important criteria are:
a. Organizational status
b. Scope of the function
c. Technical competence
d. Due professional care
4. When planning to use the work of internal auditing, the external auditor will need to consider
internal auditings tentative plan for the period and discuss it as early a stage as possible.
5. Where the work of internal auditing is to be a factor in determining the nature, timing and
extent of the external auditors procedures, it is desirable to agree in advance the timing of such
work, the extent of audit coverage, materiality levels and proposed methods of sample
selection, documentation of the work performed and review and reporting procedures.
6. A liaison with internal auditing is more effective when meetings are held at appropriate intervals
during the period.
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7. When the external auditor intends to use specific work of internal auditing, the external auditor
should evaluate and perform audit procedures on that work to confirm its adequacy for the
external auditors purposes.
8. The evaluation of specific work of internal auditing involves consideration of the adequacy of
the scope of the work and related programs and whether the preliminary assessment of the
internal auditing remains appropriate.
9. The nature, timing and extent of audit procedures performed on the specific work of internal
auditing will depend on:
The external auditors judgment as to the risk of material misstatement of the
area concerned;
The assessment of internal auditing; and
The evaluation of the specific work by internal auditing.
10. The external auditor would record conclusions regarding the specific internal auditing work that
has been evaluated and the audit procedures performed on the internal auditors work.
PSA 620
USING THE WORK OF AN EXPERT
1. Expert means a person or firm possessing special skill, knowledge and experience in a
particular filed other than accounting and auditing.
2. An expert may be:
a. Contracted by the entity;
b. Contracted by the auditor;
c. Employed by the entity; or
d. Employed by the auditor.
3. When determining the need to use the work of an expert, the auditor would consider:
a. The materiality of the financial statement item being considered;
b. The risk of misstatement based on the nature and complexity of the matter being
considered; and
c. The quantity and quality of other audit evidence available
4. When planning t use the work of an expert, the auditor should evaluate the professional
competence and objectivity of the expert.
5. The risk that an experts objectivity will be impaired increases when the expert is:
a. Employed by the entity; or
b. Related in some other manner to the entity.
6. The auditor should obtain sufficient appropriate audit evidence that the scope of the experts
work is adequate for the purposes of the audit. Audit evidence may be obtained through a
review of the terms of reference which are often set out in written instructions from the entity
to the expert.
Such instructions to the expert may cover matters such as:
a. The objectives and scope of the experts work
b. A general outline as to the specific matters the auditor expects the experts report
to cover
c. The intended use by the auditor of the experts work, including the possible
communication to third parties of the experts identity and extent f involvement
d. The extent of the experts access to appropriate records and files
e. Clarification of the experts relationship with the entity, if any.
f. Confidentiality of the entitys information
g. Information regarding the assumptions and methods intended to be used by the
expert and their consistency with those used in prior periods.
7. The auditor should evaluate the appropriateness of the experts work as audit evidence
regarding the financial statement assertion being considered. This will involve assessment of
whether the substance of the experts findings is properly reflected in the financial statements
or supports the financial statement assertions, and consideration of:
a. Source data used.
b. Assumptions and methods used and their consistency with prior periods
c. Results of the experts work in the light of the auditors overall knowledge of the
business and of the results of other audit procedures.
8. When considering whether the expert has used source data which is appropriate in the
circumstances, the auditor would consider the following procedures:
a. Making inquiries regarding any procedures undertaken by the expert to establish
whether the source data is sufficient, relevant and reliable.
b. Reviewing or testing the data used by the expert
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9. If the results of the experts work do not provide sufficient audit evidence or if the results are
not consistent with other audit evidence, the auditor should resolve the matter. This may
involve:
a. Discussions with the entity and the expert
b. Applying additional audit procedures
c. Including possibly engaging another expert; or
d. Modifying the auditors report
10. When issuing an unmodified auditors report, the auditor should not refer to the work of an
expert. Such a reference might be misunderstood to be a qualification of the auditors opinion
or a division of responsibility, neither of which is intended.
11. If as a result of the work of an expert, the auditor decides to issue a modified auditors report, in
some circumstances it may be appropriate, in explaining the nature of the modification, to refer
to or describe the work o the expert (including the identity of the expert and the extent of the
experts involvement). In these circumstances, the auditor would obtain the permission of the
expert before making such a reference. If permission is refused and the auditor believes a
reference is necessary, the auditor may need to seek legal advice.
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AUDITING THEORY
PSA 500(REVISED)
PSA 501
PSA 505
PSA 230
CPA REVIEW
AUDIT EVIDENCE
AUDIT EVIDENCE ADDITIONAL CONSIDERATIONS ON SPECIFIC ITEMS
EXTERNAL CONFIRMATIONS
AUDIT DOCUMENTATION
PSA 500(REVISED)
AUDIT EVIDENCE
1. The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable
conclusions on which to base the audit opinion
2. Audit Evidence is all the information used by the auditor in arriving at the conclusions on
which the opinion is based, and includes the information contained in the accounting records
underlying the financial statements and other information
3. Accounting records generally include:
The records of initial entries and supporting records, such as checks and records
of electronic fund transfers;
Invoices
Contracts
The general and subsidiary ledgers, journal entries and other adjustments to the
financial statements that are not reflected in formal journal entries; and
Records such as work sheets and spreadsheets supporting cost allocations,
computations, reconciliations and disclosures
4. Other information that the auditor may use as audit evidence includes:
Minutes of the meetings
Confirmations from third parties
Analysts reports
Comparable data about competitors (benchmarking)
Control manuals
Information obtained by auditors from such audit procedures as inquiry,
observation, and inspection; and
Other information developed by, or available to, the auditor that permits the
auditor to reach conclusions through valid reasoning
Sufficient appropriate evidence
1. Sufficiency is the measure of the quantity of audit evidence
2. Appropriateness is the measure of the quality of audit evidence; that is, its relevance and its
reliability in providing support for, or detecting material misstatements in, the classes of
transactions, account balances, and disclosures and related assertions.
3. The following generalizations can be made about the reliability of audit evidence:
a. Audit evidence I more reliable when it is obtained from independent sources
outside the entity
b. Audit evidence that is generated internally is more reliable when the related
controls imposed by the entity are effective
c. Audit evidence obtained directly by the auditor (for example, observation of the
application of a control) is more reliable than audit evidence obtained indirectly or
by inference (for example, the inquiry about the application of control)
d. Audit evidence is more reliable when it exists in a documentary form, whether
paper, electronic, or other medium (for example, contemporaneously written
record of a meeting is more reliable than a subsequent oral representation of the
matters discussed)
e. Audit evidence provided by original documents is more reliable than audit evidence
provided by photocopies or facsimiles
4. An audit rarely involves the authentication of documentation, nor is the auditor trained as or
expected to be an expert in such authentication
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5. When information produced by the entity is used by the auditor to perform audit procedures,
the auditor should obtain audit evidence about the accuracy and completeness of the
information
6. In forming an audit opinion, the auditor does not examine all the information available because
conclusions ordinarily can be reached by using sampling approaches and other means of
selecting items for testing.
The use of assertions in obtaining audit evidence
1. Management is responsible for the fair presentation of financial statements that reflect the
nature and operations of the entity.
2. In representing that the financial statements are presented fairly, in all material respects, in
accordance with the applicable financial reporting framework, management implicitly or
explicitly makes assertions regarding the recognition, measurement, presentation, and
disclosure of the various elements of financial statements and related disclosures
3. The auditor should use assertions for classes of transactions, account balances, and
presentation and disclosures in sufficient detail to form a basis for the assessment of risks of
material misstatement and the design and performance of further audit procedures
CATEGORIES OF ASSERTIONS
a. Assertions about classes of transactions and events for the period under audit:
1. OCCURRENCE
- transactions and events that have been recorded have
occurred and pertain to the entity
2. COMPLETENESS
- all transactions and events that should have been recorded
have been recorded.
3. ACCURACY
- amounts and other data relating to recorded transactions and
events have been recorded appropriately
4. CUTOFF
- transactions and events have been recorded in the correct
accounting period
5. CLASSIFICATION
- transactions and events have been recorded in the proper
accounts
b. Assertions about account balances at the period end:
1. EXISTENCE
-assets, liabilities, and equity interests exist
2. RIGHTS AND OBLIGATIONS
- the entity holds or controls the right to assets,
and liabilities are obligations of the entity
3. COMPLETENESS
- all assets, liabilities, and equity interests that
should have been recorded have been recorded
4. VALUATION AND ALLOCATION
- assets, liabilities and equity interests are
included in the financial statements at appropriate amounts and any resulting
valuation or allocation adjustments are appropriately recorded
3. SUBSTANTIVE PROCEDURES
Detect material misstatements at the assertion level. These include analytical review
procedures and tests of details
Examples of audit procedures
1. INSPECTION
Consists of examining records and documents, whether internal or external in paper
form, electronic form, or other media. Inspection of tangible assets consists of physical
examination of the assets.
2. OBSERVATION
Consists of looking at a process or procedure being performed by others
3. INQUIRY
Consists of seeking information of knowledgeable persons, both financial and
nonfinancial, throughout the entity or outside the entity
4. CONFIRMATION
The process of obtaining a representation of information or of an existing condition
directly from a third party
5. RECALCULATION
Consists of checking the mathematical accuracy of documents or records
6. REPERFORMANCE
The auditors independent execution of procedures or controls that were originally
performed as part of the entitys internal control, either manually or through the use of
CAATs
7. ANALYTICAL PROCEDURES
Consists of evaluations of financial information made by a study of plausible
relationships among both financial and nonfinancial data. It also encompasses the
investigation of identified fluctuations and relationships that are inconsistent with other
relevant information or deviate significantly from predicted amounts.
PSA 501
AUDIT EVIDENCE ADDITIONAL CONSIDERATIONS ON SPECIFIC ITEMS
Attendance at Physical Inventory Counting
1. When inventory is material to the financial statements, the auditor should obtain sufficient
appropriate audit evidence regarding its existence and condition by attendance at physical
inventory counting unless impracticable.
2. If unable to attend the physical inventory count on the date panned due to unforeseen
circumstances, the auditor should take or observe some physical counts on an alternative date
and, when necessary, perform tests of intervening transactions.
3. Where attendance is impracticable, due to factors such as the nature and location of the
inventory, the auditor should consider whether alternative procedures provide sufficient
appropriate audit evidence of existence and condition to conclude that the auditor need not make
reference to a scope limitation.
4. In planning attendance at the physical inventory count or the alternative procedures, the auditor
would consider:
The nature of the accounting and internal control systems used regarding inventory.
Inherent, control, and detection risks, and materiality related to inventory.
Whether adequate procedures are expected to be established and proper instructions issued
for physical inventory counting.
The timing of the count.
The locations at which inventory is held.
Whether an experts assistance is needed.
5. The auditor would review managements instructions regarding:
The application of control procedures, for example, the collection of used stocksheets,
accounting for unused stocksheets, and count and recount procedures.
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6. To obtain assurance that managements procedures are adequately implemented the auditor
would observe employees procedures and perform test counts.
7. The auditor would also consider cutoff procedures including details of the movement of inventory
just prior to, during, and after the count so that the accounting for such movements can be
checked at a later date.
8. The auditor would test the final inventory listing to assess whether it accurately reflects actual
inventory counts.
9. When inventory is under the custody and control of a third party, the auditor would ordinarily
obtain direct conformation from the third party as to the quantities and condition of inventory
held on behalf of the entity. Depending on the materiality of this inventory, the auditor would
consider:
The integrity and independence of the third party.
Observing, or arranging for another auditor to observe, the physical inventory count.
Obtaining another auditors report on the adequacy of third partys accounting and internal
control systems for ensuring that inventory is correctly counted and adequately safeguarded.
Inspecting documentation regarding inventory held by third parties, for example, warehouse
receipts, or obtaining confirmation from other parties when such inventory has been pledged
as collateral.
Procedures regarding litigation and claims
1. The auditor should carry out procedures in order to become aware of any litigation and claims
involving the entity, which may have a material effect on the financial statements.
Such procedures would include:
Make appropriate inquiries of management including obtaining representations.
Review board minutes and correspondence with the entitys lawyers.
Examine legal expense accounts.
Use any information obtained regarding the entitys business including information obtained
from discussions with any inhouse legal department.
2. When litigation or claims have been identified or when the auditor believes they may exist, the
auditor should seek direct communication with the entitys lawyers.
3. The letter, which should be prepared by management and sent by the auditor, should request the
lawyer to communicate directly with the auditor. When it is considered unlikely that the lawyer
will respond to a general inquiry, the letter would ordinarily specify:
A list of litigation and claims.
Managements assessment of the outcome of the litigation or claim and its estimate of the
financial implications, including costs involved.
A request that the lawyer confirms the reasonableness of managements assessments and
provides the auditor with further information if the list is considered by the lawyer to be
incomplete or incorrect.
4. The auditor considers the status of legal matters up to date of the audit report.
5. If management refuses to give the auditor permission to communicate with the entitys lawyers,
this would be a scope limitation and should ordinarily lead to a qualified opinion or a disclaimer of
opinion.
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7. When the auditor forms a conclusion that the confirmation process and alternative procedures
have not provided sufficient appropriate audit evidence regarding an assertion, the auditor should
undertake additional procedures to obtain sufficient audit evidence.
8. The auditor should evaluate whether the results of the external confirmation process together
with the results from any other procedures performed, provide sufficient appropriate audit
evidence regarding the assertion being audited.
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AUDITING THEORY
CPA REVIEW
PSA 250
PSA 260
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PSA 250
CONSIDERATION OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS
1. Noncompliance as used in PSA 250 refers to acts of omission or commission by he entity being
audited, either intentional and unintentional, which are contrary to the prevailing laws and
regulations
2. Noncompliance does not include personal misconduct (unrelated to the business activities of
the entity) by the entitys management or employees
3. When planning and performing audit procedures and in evaluating and reporting the results
thereof, the auditor should recognize that noncompliance by the entity with laws and regulation
may materially affect the financial statements
Responsibility of management for the compliance with laws and regulations
1. It is managements responsibility to ensure that the entitys operations conducted in accordance
with laws and regulations
2. The responsibility for the prevention and detection of noncompliance rests with management
3. The following policies and procedures, among others, may assist management in discharging its
responsibilities for the prevention and detection of noncompliance:
Monitoring legal requirements and ensuring that operating procedures are designed to
meet these requirements
Instituting and operating appropriate systems of internal control
Developing, publicizing and following a Code of Conduct
Ensuring employees are properly trained and understand the Code of Conduct
Monitoring compliance with the Code of Conduct and acting appropriately to discipline
employees who fail to comply with it
Engaging legal advisors to assist in monitoring legal requirements
Maintaining a register of significant laws with which the entity has to comply within its
particular industry and a record of complaints
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AUDITING THEORY
CPA REVIEW
AUDIT SAMPLING
(BASED ON PSA 530: AUDIT SAMPLING AND OTHER SELECTIVE TESTING PROCEDURES)
Audit sampling plan refers to the procedures an auditor applies t accomplish a sampling application. In
aids an auditor I forming conclusions about one r more characteristics or either a particular class of
transactions or a particular account balances
1. ATTRIBUTE SAMPLING
Applicable to tests of control
Used to test an entitys rate of deviation (also called rate of occurrence) from a
prescribed control procedure
2. VARIABLES SAMPLING
Applicable to substantive test
Most commonly used to test whether recorded account balances are fairly stated
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SAMPLING RISK
1. It arises from the possibility that the auditors conclusion, based on a sample may be different
from the conclusion reached if the entire population were subjected to the same audit
procedures
2. The confidence level (also called reliability level) is the mathematical complement of the
applicable sampling risk factor
3. It is to be measured and controlled. The auditor controls it by specifying the acceptable level
when developing the sampling design
4. For tests of control, it has the following aspects:
a. Risk of assessing control risk too low (Risk of Overreliance)
The risk that the auditor would conclude that the control risk is lower
than it actually is
It affects audit effectiveness and is more likely to lead to an
inappropriate audit opinion
b. Risk of assessing control risk too high (Risk of under reliance)
The risk that the auditor would conclude that control risk is higher than
actually is
It affects audit efficiency as it would lead to additional work to establish
that initial conclusions were incorrect
5. For substantive tests, it has the following aspects:
a. Risk of incorrect acceptance
The risk that the auditor would conclude that a material error exists
when in fact it does
It affects audit effectiveness and is more likely to lead to an
inappropriate audit opinion
b. Risk of incorrect rejection
The risk that the auditor would conclude that a material error exists
when in fact it does not
It affects audit effectiveness as it would lead to additional work to
establish that initial conclusions were incorrect
NONSAMPLING RISK
It arises from factors that cause the auditor to reach an erroneous conclusion for any reason not related
to the size of the sample. For example, most audit evidence is persuasive rather than conclusive, the
auditor might use inappropriate procedures, or the auditor might misinterpret evidence and fail to
recognize an error.
5 STEPS IN ATTRIBUTE SAMPLING PLAN
1. Define the objectives of the plan
2. Define the population
For example, if an auditors objective is to test controls designed to assure
that all shipped goods are invoiced, the population would be defined as all
sipping documents issued during the period not all sales invoices
3. Define the attribute and deviation conditions
An attribute s a characteristic of control. For example, the supervisors
signature of approval on a document. A deviation is the absence of an
attribute
4. Determine the sample size
The sample size is determined by considering the following factors:
a. Risk of assessing control risk too low
b. Tolerable deviation rate
c. Expected population deviation rate
Risk of assessing control risk too low
There is an inverse relationship between the risk and the sample size. The higher the
acceptable risk, the smaller the sample size
Because the risk of assessing control risk too low relates to the effectiveness of the
audit, it is kept at a relatively low level by the auditor
Tolerable deviation rate
This the maximum deviation rate that the auditor is willing to accept
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The lower the rate of deviation that the auditor is willing to accept, the larger the
sample size needs to be
The maximum deviation rate is based on the sample size and the number of
deviations discovered. There are standard tables that yield maximum population
deviation rates at specified risks of assessing control risk too low
Allowance for sampling risk = Maximum Deviation Rate Sample Deviation Rate
c. Considering qualitative information
The auditor considers each of the deviations nature, importance, and probable cause
d. Reaching an overall conclusion
In assessing control risk, the auditor considers all available quantitative and qualitative
information
COMMONLY USED ATTRIBUTES SAMPLING TECHNIQUES
1. ATTRIBUTE ESTIMATION SAMPLING
A statistical sampling plan for tests of controls
Appropriate when an auditor wishes to estimate a true but unknown population
deviation rate
Uses a fixed sampling plan, i.e., the auditor tests a single sample
2. SEQUENTIAL SAMPLING (ALSO CALLED STOP-OR-GO SAMPLING)
The sampling plan is performed in several steps
Following each step, the auditor decides whether to stop or to go on to the next step
Appropriate when the auditor expects zero or very few deviations
3. DISCOVERY SAMPLING
Appropriate when the expected deviation rate is near zero and when the auditors
objective is to find at least one deviation in a sample if the actual population deviation
rate exceeds or equals a predetermined critical rate (tolerable deviation rate)
STEPS IN A VARIABLE SAMPLING PLAN
1. Determine the objectives of the test
The auditors objective is to test the reasonableness of a record account balance, called
hypothesis testing.
2. Define the population and sampling unit
3. Choose an audit sampling technique
a. Statistical vs. Nonstatistical
b. Classical variables sampling vs. Probability-proportional-to-size sampling
4. Determine the sample size
The auditor considers the following:
a. Variation within the population
Sample size varies in the same direction as the variation in population amounts. As
population variation increases, so does the sample size
An estimate of population variation is made by determining a population standard
deviation
b. Acceptable risk of incorrect rejection
c. Acceptable risk of incorrect acceptance
d. Tolerable error the maximum monetary error that may exist in an account balance
without causing the financial statements to be materially misstated
5. Determine the method of sample selection
6. Perform the sampling plan
7. Evaluate the sample results
The following procedures are performed:
a. Projecting the same error to the population
b. Considering sampling risk
c. Considering qualitative information
d. Reaching an overall conclusion
CLASSICAL VARIABLES SAMPLING TECHNIQUES
A. Mean-per-unit estimation
A classical variables sampling technique that projects the sample average to the
population by multiplying the sample average by the number of items in the population
B. Difference estimation
It is a classical variables sampling technique that uses the average difference between
audited amounts and individual recorded amounts to estimate the total audited amount of a
population and an allowance for sampling risk.
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C. Ratio estimation
A classical variables sampling technique that uses the ratio of audited amounts to
recorded amount in the sample to estimate the total amount of the population and an
allowance for sampling risk
Conditions for using difference and ration estimation
1. Each population item must have a recorded book value
2. Total population book value must be known
3. Expected differences between audited and recorded book values must not be too rare
Choosing between difference and ratio estimation
Ratio estimation is more appropriate when he differences are nearly proportional to book
values.
Difference estimation is more appropriate when there is little or n relationship between the
absolute amounts of the differences and the book values.
PROBABILITY-PROPROTIONAL-TO-SIZE SAMPLING (PPS)
PPS uses a peso as the sampling unit
PPS sampling gives each individual peso in the population an equal chance of selection
PPS is only useful for TESTS OF OVERSTATEMENTS (e.g., assets) since the sample selection
method dictates that the larger the transaction or amount, the more likely that it will be
selected.
PPS is inappropriate for testing liabilities because understatement is the primary audit
consideration
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decrease
increase
increase
negligible effect
increase
decrease
increase
decrease
increase
decrease
negligible effect
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AUDITING THEORY
CPA REVIEW
AUDITING IN A CIS (IT) ENVIRONMENT
1. A CIS environment exists when a computer of any type or size is involved in the processing by
the entity of financial information of significance to the audit, whether the computer is operated
by the entity or by a third party
2. The overall objective and scope of an audit does not change in a CIS environment
3. A CIS environment may affect:
a. The procedures followed in obtaining a sufficient understanding of the accounting
and internal control systems
b. The consideration of the inherent and control risk
c. The design and performance of tests of controls and substantive procedures
4. The auditor should have sufficient knowledge of the CIS to plan, direct, and review the work
performed
5. If specialized skills are needed, the auditor would seek the assistance of a professional
possessing such skills, who may be either on the auditors staff or an outside professionals
6. In planning the portions of the audit which may be affected by the clients CIS environment, the
auditor should obtain an understanding of the significance and complexity of the CIS activities
and the availability of data for use in the audit
7. When the CIS are significant, the auditor should also obtain an understanding of the CIS
environment and whether it may influence the assessment of inherent and control risks
8. The auditor should consider the CIS environment in designing audit procedures to reduce audit
risk to an acceptably low level. The auditor can use either manual audit procedures, computerassisted audit techniques, or a combination of both to obtain sufficient evidential matter
RISK ASSESSMENTS AND INTERNAL CONTROL:
CIS CHARACTERISTICS AND CONSIDERATION
Organizational Structure
Characteristics of a CIS organizational structure includes:
a. Concentration of functions and knowledge
Although most systems employing CIS methods will include certain manual operations,
generally the number of persons involved in the processing of financial information is significantly
reduced.
b. Concentration of programs and data
Transaction and master file data are often concentrated, usually in machine-readable
form, either in one computer installation located centrally or in a number of installations distributed
throughout the entity.
Nature of Processing
The use of computers may result in the design of systems that provide less visible evidence than
those using manual procedures. In addition, these systems may be accessible by a larger number of
persons.
System characteristics that may result from the nature of CIS processing include:
a. Absence of input documents
Data may be entered directly into the computer system without supporting document
In some on-line transaction systems, written evidence of individual data entry
authorization (e.g., approval for order entry) may be replaced by other procedures, such
as authorization controls contained in computer programs (e.g., credit limit approval)
b. Lack of visible audit trail
The transaction trail may be partly in machine-readable form and may exist only for a
limited period of time (e.g., audit logs may be set to overwrite themselves after a period of time or
when the allocated disk space is consumed)
c. Lack of visible output
Certain transactions or results of processing may not be printed or only summary data
may be printed
d. Ease of access to data and computer programs
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Data and computer programs may be assessed and altered at the computer or through
the use of computer equipment at remote locations. Therefore, in the absence of appropriate controls,
there is an increased potential for unauthorized access to, and alteration of, data and programs by
persons inside or outside the entity
Design and procedural aspects
The development of CIS will generally result n design and procedural characteristics that are
different from those found in manual systems. These different design and procedural aspects of CIS
include:
a. Consistency of performance
CIS perform functions exactly as programmed and are potentially more reliable than
annual systems, provided that all transactions types and conditions that could occur are anticipated and
incorporated into the system. On the other hand, a computer program that is not correctly programmed
and tested may consistently process transactions or other data erroneously
b. Programmed control procedures
The nature of computer processing allows the design of internal control procedures in
computer programs
c. Single transaction update of multiple or data base computer files
A single input t the accounting system may automatically update all records associated
with the transaction
d. Systems generated transactions
Certain transactions may be initiated by the CIS itself without the need for an input
document
e. Vulnerability of data and program storage media
Large volumes of data and the computer programs used to process such data may be
stored on portable or fixed storage media, such as magnetic disks and tapes. These media are vulnerable
to theft, loss, or intentional or accidental destruction.
INTERNAL CONTROLS IN A CIS ENVIRONMENT
GENERAL CIS CONTROLS to establish a framework of overall control over the CIS activities and to
provide a reasonable level of assurance that the overall objectives of internal control are achieved
General CIS controls may include:
a. Organization and management controls designed to define the strategic direction and
establish an organizational framework over CIS activities, including:
Strategic information technology plan
CIS policies and procedures
Segregation of incompatible functions
Monitoring of CIS activities performed by third party consultants
b. Development and maintenance controls designed to provide reasonable assurance that
systems are developed or acquired, implemented and maintained in an authorized and efficient
manner. They also typically are designed to establish control over:
Project initiation, requirements definition, systems design, testing, data conversion, golive decision, migration to production environment, documentation of new or revised
systems, and user training
Acquisition and implementation of off-the-shelf packages
Request for changes to the existing systems
Acquisition, implementation, and maintenance of system software
c. Delivery and support controls designed to control the delivery of CIS services and include:
Establishment of service level agreements against which CIS services are measured
Performance and capacity management controls
Disaster recovery/contingency planning, training, and file backup
Computer operations controls
Systems security
Physical and environment controls
d. Monitoring controls designed to ensure that CIS controls are working effectively as planned.
These include:
Monitoring of key CIS performance indicators
Internal external CIS audits
CIS APPLICATION CONTROLS to establish specific control procedures over the application systems in
order to provide reasonable assurance that all transactions are authorized, recorded and are processed
completely, accurately and on a timely basis. CIS application controls include:
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d. On-line/ inquiry
Restricts users at terminal devices to making inquiries of master file
Master files are updated by other systems, usually on a batch basis
e. On-line downloading/ uploading processing
On-line downloading refers to the transfer of data from a master file to
an intelligent terminal device for further processing by a user
NETWORK ENVIRONMENT
1. A network environment is a communication system that enables computer users to share
computer equipment, application software, data, and voice and video transmissions
2. A file server is a computer with an operating system that allows multiple users in a network to
access software applications and data files
3. Basic types of networks
a. Local area network (LAN)
b. Wide area network (WAN)
c. metropolitan area network (MAN)
CIS ENVIRONMENTS DATABASE SYSTEMS
1. DATABASE a collection of data that is shared and used by many different users for different
purposes
2. Two components of database systems:
a. Database
b. Database management system (DBMS) software that creates, maintains, and
operates the database
3. Characteristics of database systems:
a. Data sharing
b. Data independence
TERMS USED IN CIS ENVIRONMENTS
HARDWARE
1. COMPUTER HARDWARE consists of the configuration of physical electronic equipment
2. CONSOLE a special CRT (Cathode Ray Tube) used for communication between the operator
and the computer.
3. PERIPHERAL EQUIPMENT all non-CPU hardware that may be placed under the control of the
processor. This consists of input, storage, output, and communication devices
4. CONTROLLERS units designed to operate (control) specific input/output devices
5. CHANNELS units designed to handle the transfer of data into or out of primary storage
(memory)
6. BUFFER MEMORY (BUFFER) temporary storage unit used to hold data during input/output
operations
7. OFF-LINE peripheral equipment not in direct communication with the CPU
8. ON-LINE peripheral equipment in direct communication with, and under the control of the
CPU
9. INPUT DEVICES provides a means of transferring data into CPU storage
a. Magnetic tape reader capable of sensing information recorded as magnetized
spots on magnetic tape. It is also used as an output device and storage medium.
b. Magnetic ink character reader( MICR) reads characters by scanning temporarily
magnetized characters using magnetic ink
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10.
11.
12.
13.
14.
Software consists of computer programs which instruct the computer hardware to perform the desired
processing.
Types of computer programs
1. OPERATING SYSTEM controls the functioning of the CPU and its peripheral equipment. Several
different operating systems allow a single configuration of hardware to function in the following
modes:
a. MULTIPROGRAMMING the operating system processes a program until an
input/output operation is required. Since input or output can be handled by
peripheral devices, such as channels and controllers, the CPU can begin executing
another programs instructions. Several programs appear to be concurrently
processing
b. MULTIPROCESSING multiple CPUs process data while sharing peripheral devices,
allowing two or more programs to be process simultaneously
c. VIRTUAL STORAGE the operating system separates user programs into segment
pages automatically. It appears as though there is unlimited memory available for
programs, even though the program is still confined to a physical segment of
memory.
2. UTILITY PROGRAM performs a commonly required process, such as storing and merging
3. APPLICATION PROGRAM performs the desired processing tasks (e.g., payroll preparation)
4. SOURCE PROGRAM written by a programmer in a source language (e.g., COBOL) that will be
converted into an object program
5. OBJECT PROGRAM converted source program that was changed using a complier to create a
set of machine-readable instructions
6. COMPILER converts a source program to a machine language object program
7. INTERPRETER converts each source code instruction to object code each time it is executed
8. DATABASE MANAGEMENT SYSTEM (DBMS) a software package for the purpose of creating,
accessing, and maintaining a database
9. TELECOMMUNICATIONS MONITOR PROGRAM provides edit capabilities and file maintenance
to users, monitors on-line terminals, and handles input to application programs
ELECTRONIC DATA INTERCHANGE (EDI) the electronic exchange of transactions, from one entitys
computer to another entitys computer through an electronic communications network. In electronic
fund transfer (EFT) Systems, for example, electronic transactions replace checks as a mean of payment.
EDI controls include:
a. Authentication controls must exist over the origin, proper submission, and proper delivery
of EDI communications to ensure that the EDI messages are accurately sent and received to
and from authorized customers and suppliers.
b. Encryption involves conversion of plain text data to cipher text data to make EDI messages
unreadable to unauthorized persons
c. VAN controls a value added network (VAN) is a computer service organization that
provides network, storage, and forwarding (mailbox) services for EDI messages
AUDIT APPROACHES
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1. Auditing around the computer the auditor ignores or bypasses the computer processing
function of an entitys EDP system
2. Auditing with the computer the computer is used as an audit tool
3. Auditing through the computer the auditor enters the clients system and examines directly
the computer and its system and application software
COMPUTER ASSISTED AUDIT TECHNIQUES FOR TESTS OF CONTROLS
I.
Program analysis techniques that allow the auditor to gain an understanding of the clients
program
1. Code review involves actual analysis of the logic of the programs processing
routines
2. Comparison programs programs that allow the auditor to compare computerized
files
3. Flowcharting software used to produce a flowchart of a programs logic and may
be used both in mainframe and microcomputer environments
4. Program tracing and mapping program tracing is a technique in which instruction
executed is listed along with control information affecting that instruction. Program
mapping identifies sections of code which may be potential source of abuse
5. Snapshot this technique takes a picture of the status of program execution,
intermediate results, or transaction data at specified processing points I the
program processing
II.
Program testing involves the use of auditor-controlled actual or simulated data
1. Historical audit techniques test the audit computer controls at a point in time
a. Test data
A set of dummy transactions specifically designed to test the control
activities that management claims to have incorporated into the
processing programs
Shifts control over processing to the auditor by using the clients
software to process auditor-prepared test data that includes both valid
and invalid conditions
It embedded controls are functioning properly, the clients software
should detect all the exceptions planted in the auditors test data
Ineffective if the client does not use the software tested
b. Base case system evaluation (BCSE)
Develops test data that purports to test every possible condition that an
auditor expects a clients software will confront
Provides an auditor with much more assurance than test data alone, but
expensive to develop and therefore cost-effective only in large
computer systems
c. Integrated test facility (ITF)
A variation of test of data whereby simulated data and actual data are run simultaneously
with the clients program and computer results are compared with auditors predetermined
results
It provides assurance that the software tested is actually used to prepare financial reports
d. Parallel simulation
It involves of processing clients live (actual) data utilizing an auditors generalized audit
software
If an entitys control have been operating efficiently, the clients software should generate the
same exceptions as the auditors software
It should be performed on a surprise basis, I possible
e. Controlled reprocessing
A variation of parallel simulation, it involves processing of actual client data through a copy of
the clients application program
2. Continuous audit techniques test the audit computer controls throughout a
period.
a. Audit modules programmed audit routines incorporated into an
application program that are designed to perform an audit function such as
a calculation, or logging activity
b. Systems control audit review files (SCARFs) log that collect transaction
information for subsequent review and analysis by the auditor
c. Audit hooks exists in an entitys computer program that allows an
auditor to insert commands for audit processing
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AUDITING THEORY
CPA REVIEW
COMPLETING THE AUDIT
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3. When the auditor becomes aware of events which materially affect the financial statements, the
auditor should consider whether such events are properly accounted for and adequately
disclosed in the financial statements
INQUIRIES OF CLIENTS LEGAL COUNSEL
1. The auditor is required to communicate directly with a clients attorney about liabilities arising
from litigations, claims, and assessments
2. A list of legal issues should be prepared by the clients management, rather than the clients
attorney. This information is sent by the auditor to the auditor to the attorney, requesting
information about:
a. Pending or threatened litigation, claims, and assessments
b. Unasserted claims and assessments
3. The client should request the attorney to furnish the following information for all pending or
threatened litigation, claims, and assessments, and to comment on differences between the
attorneys and managements views:
a. A description of the nature of the matter, progress to date, and action that client
intends to take
b. An evaluation of the likelihood of an unfavorable outcome and an estimate, if one
can be made, of the amount or range of potential loss
c. A statement that managements list of pending or threatened claims is complete, or
identification of any omissions
4. The attorneys refusal to reply to the audit inquiry is a SCOPE LIMITATION that may affect the
audit report
5. In the case of unasserted claims which the client has not disclosed, the lawyer is not required to
note them in his or her reply to the auditor. However, the lawyer is generally required to inform
the client of the omission and to consider withdrawing if the client fails to inform the auditor
MANAGEMENT REPRESENTATION LETTER
(BASED ON PSA 560 MANAGEMENT REPRESENTATIONS)
1. The representation letter
a. Confirms the oral representations given by management to the auditor and reduces
the possibility of misunderstanding between the client and the auditor
b. Reminds management of its primary responsibility for the financial statements
c. Addressed to the auditor
d. Dated as of the audit report date
e. Signed by the CEO and the CFO
f. Not a substitute for the application of other necessary auditing procedures
2. If management refuses to provide a representation that the auditor considers necessary, this
constitutes a scope limitation and the auditor should express a qualified opinion or a disclaimer
of opinion
3. Written representations requested from management may be limited to matters that are
considered either individually or collectively material to the financial statements
(DATE)
The representation letter is provided in connection with your audit of the financial statements of ABC Company for
the year ended December 31, 20X1 for the purpose of expressing an opinion as to whether the financial
statements present fairly, in all material aspects, the financial position of ABC Company as of December 31, 20X1
and of the results of its operations and its cash flows for the year time ended in accordance with (indicate relevant
financial reporting framework).
We acknowledge our responsibility for the fair presentation of the financial statements in accordance with
(indicate relevant financial reporting framework).
We confirm to the best of our knowledge and belief, the following representations:
Include here representations relevant to the entity. Such representations may include:
There have been no irregularities involving management or employees who have a significant role in
the accounting and internal control systems or that could have a material effect on the financial
statements
We have made available to you all the books of account and supporting documentation and all minutes
of meetings and shareholders and BOD (namely those held on (dates) respectively)
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We confirm the completeness of the information provided regarding the identification of related
parties
The financial statements are free of material misstatements, including omissions
The company has complied with all aspects of contractual agreements that could have a material effect
on the financial statements in the event of noncompliance. There has been no noncompliance with
requirements of regulatory authorities that could have a material effect on the financial statements in
the event of noncompliance.
We have no plans or intentions that may affect or alter the carrying value or classification of asset and
liabilities reflected in the financial statement
(no plans regarding the inventory abandonment or no inventory were stated in an amount in excess of
net realizable value)
Indicate that there are no events subsequent to period which require adjustments in the statements
Indicate that the claim is settled in a specific amount and there are no other litigations are expected to
be received
Indicate that there are no formal or informal compensating balance arrangements with any of the cash,
except those that are disclosed
Indicate that you have recorded material regarding the capital per se
______________________
(Senior Executive Officer)
______________________
(Senior Financial Officer)
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AUDITING THEORY
CPA REVIEW
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Qualified opinion
Should be expressed when the auditor concludes that the unqualified opinion cannot be
expressed but that the effect of any disagreement with management, or limitation on
scope is not so material and pervasive as to require an adverse opinion or a disclaimer
of opinion.
A qualified opinion should be expressed as being except for the effects of the matter
to which the qualification relates.
Adverse opinion
Should be expressed when the effect of the disagreement is so material and pervasive
to the financial statements that the auditor concludes that a qualification of the report
is not adequate to disclose the misleading or incomplete nature of the financial
statements.
Disclaimer of Opinion
Should be expressed when the possible effect of a limitation on the scope is so material
and pervasive that the auditor has not been able to obtain sufficient appropriate audit
evidence and accordingly is unable to express an opinion on the financial statements.
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REPORT MODIFICATIONS
Limitation on scope
ILLUSTRATIVE EXAMPLES OF MODIFIED REPORTS
1. LIMITATION ON SCOPE QUALIFIED OPINION
We have audited (remaining words are the same as in the introductory page)
Management is responsible for (same as illustrated in the managements responsibility
paragraph)
Our responsibility is to express an opinion on these financial statements based on our audit.
Except as discussed in the following paragraph, we conducted our audit in accordance with
(auditors responsibility paragraph)
We did not observe the counting of the physical inventories as of December 31, 20X1, since that
date was prior to the time we were initially engaged as auditors for the company. Owing to the
nature of the companys records, we were unable to satisfy ourselves as to inventory quantities
by other audit procedures.
In our opinion, except for the effects of such adjustments, if any, as might have been determined
to be necessary had we been able to satisfy ourselves as to physical inventory quantities, the
financial statements fairly presents, in all material respects (opinion paragraph)
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5. When the management amends the financial statements, the auditor would carry out
the procedures necessary in the circumstances and would provide management with a
new report on the amended financial statements
6. The new auditors report would be dated not earlier than the date the amended
financial statements are signed or approved and, accordingly, the procedures to identify
subsequent events would be extended to the date of the new auditors report
7. When management does not amend the financial statements but the auditor believes
they need to be amended and the auditors report has not been released to the entity,
the auditor should express a qualified opinion or an adverse opinion.
Facts discovered after the financial statements have been issued
8. After the financial statements have been issued, the auditor has no obligation to make
any inquiry regarding such financial statements.
9. When, after the financial statements have been issued, the auditor becomes aware of a
fact which existed at the date of the auditors report and which, if known at date, may
have caused the auditor to modify the auditors report, the auditor should:
o Consider whether the financial statements need revision
o Discuss the matter with management
o Take the appropriate action in the circumstances
10. When management revises the financial statements, the auditor would:
o Carry out the audit procedures necessary in the circumstances
o Review the steps taken by management to ensure that anyone in receipt of the
previously issued financial statements together with the auditors report thereon
is informed of the situation.
o Issue a new report on the revised financial statements:
Include an emphasis of a matter paragraph.
Would be dated earlier than the date the revised financial statements are
approved
The auditor is permitted to restrict the audit procedures regarding the
revised financial statements to effects of the subsequent event that
necessitated the revision.
11. It may not be necessary to revise the financial statements and issue a new auditors
report when issue of the financial statements for the following period is imminent,
provided appropriate disclosures are to be made in such statements
USING THE WORK OF ANOTHER AUDITOR (BASED ON PSA 600)
1. The principal auditor is the auditor with responsibility for reporting on the financial
statements of an entity when those financial statements include financial information of
one or more components audited by another auditor
2. The auditor should consider whether the auditors own participation is sufficient to be
able to act as principal auditor. The following would be considered:
o The materiality of the portion of the financial statements which the principal
auditor audits
o The principal auditors degree of knowledge regarding the business of the
components
o The risk of material misstatements in the financial statements of the
components audited by the other auditor
o The performance of additional procedures as set out in PSA 600 regarding the
components audited by other auditor resulting in the principal auditor having
significant participation in such audit
3. When planning to use the work of another auditor, the principal auditor should:
o Consider the professional competence of the other auditor in the context of
specific assignment
o Perform procedures to obtain sufficient appropriate audit evidence that the
work of the other auditor is adequate for the principal auditors purposes in the
context of the specific assignment
o Consider the significant findings of the other auditor
4. Reporting conclusions
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o When the principal auditor concludes that the work of the other cannot be used
and the principal auditor has not been able to perform sufficient additional
procedures regarding financial information of the component audited by the
other auditor, the principal auditor should express a qualified or a disclaimer of
opinion because of a scope of limitation.
o If the auditor issues or intend to issue, a modified auditors report, the principal
auditor would consider whether the subject of modification is of such a nature
and significance, in relation to the financial statements of the entity on which the
principal auditor is reporting that a modification on the principal auditors report
is required.
5. Division of responsibility
o When the principal auditor bases the audit opinion on the financial statements
taken as a whole solely upon the report of another auditor regarding the audit of
one or more components, the principal auditors report should state this fact
clearly and should indicate the magnitude of the portion of the financial
statements audited by the other auditor.
COMPARATIVES (BASED ON PSA 710)
1. Two broad financial reporting frameworks for comparatives:
CORRESPONDING FIGURES
o For the prior periods, these are an integral part of the current period financial
statements and have to be read in conjunction with the amounts and other
disclosures relating to the current period.
o These are not presented as complete financial statements capable of standing
alone
o The auditor should obtain sufficient appropriate audit evidence that the
corresponding figures meet the requirements of GAAP in the Philippine
o The auditor should assess whether:
Accounting policies used for the corresponding figures are consistent
with those of the current period or whether appropriate adjustments
and/or disclosures have been made
Corresponding figures agree with the amounts and other disclosures
presented in prior period or whether appropriate adjustments and/or
disclosures have been made
COMPARATIVE FINANCIAL STATEMENTS
These comparative financial statements for the prior period(s) are considered separate
financial statements.
These are presented for comparison with the financial statements of the current period,
but do not form part of the current period financial statements
The auditor should obtain sufficient appropriate evidence that the comparative financial
statements meet the requirements of GAAP in the Philippines
The auditor should assess whether:
o Accounting policies of the prior period are consistent with those of the current
period or whether appropriate adjustments and/or disclosures have been made
o Prior period figures presented agree with the amounts and other disclosures
presented in the prior period or whether appropriate judgments and disclosures
have been made
REPORTING CORRESPONDING FIGURES
1. The comparatives are not specifically identified in the audit report because the auditors
opinion is on the current period financial statements as a whole, including the
corresponding figures
2. When the auditors report on the prior period, as previously issued, included an opinion
other than unqualified and the matter which gave rise to the modification is:
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1. An entity ordinarily issues on an annual basis a document which includes its audited
financial statements together with the auditors report thereon, also called annual
report.
Material inconsistencies
2. This exists when the other information contradicts information contained in the audited
financial statements
3. If, on reading the other information, the auditor identifies material inconsistency, the
auditor should determine whether the financial statements need to be amended
If the amendment is necessary and the entity refuses to make an
amendment, the auditor should express a qualified or adverse opinion
If the amendment is necessary and the entity refuses to make an
amendment, the auditor should consider including in the auditor auditors
report an emphasis of matter paragraph.
Material misstatements of facts
4. A Material misstatements of fact in other information exists when such information, not
related to matters appearing in the audited financial statements, is incorrectly stated or
presented
5. If the auditor becomes aware that there is a misstatement of fact, the auditor should
discuss the matter with the entitys management
6. When the auditor still considers there is an apparent misstatement of fact in the other
information which management refuses to correct, the auditor should consider taking
appropriate action such as notifying those persons ultimately responsible for the overall
direction of the entity in writing of the auditors concern regarding the other
information and obtaining legal advice
THE AUDITORS REPORT ON SPECIAL PURPOSE AUDOT ENGAGEMENTS
(BASED ON PSA 800)
1. Special purpose audit engagements include:
a. Financial statements prepared in accordance with a comprehensive basis of
accounting other than GAAP in the Philippines
b. Specified accounts, elements of accounts, or terms in a financial statement
c. Compliance with contractual agreements
d. Summarized financial statements
2. The auditor should assess and review the conclusions drawn from the audit evidenced
obtained during the special purpose audit engagement as the basis for an expression of
opinion. The report should contain a clear written expression of opinion
3. Before undertaking a special purpose audit engagement, the auditor should ensure
there is agreement with the client as to the exact nature of the engagement and the
form and content of the report to be issued
4. The auditors report on a special purpose audit engagement, except for a report on
summarized financial statements, should include the following basic elements,
ordinarily in the following layout:
Title
Addressee
Opening or introductory paragraph
o Identification of the financial information audited
o A statement of the responsibility of the entitys management and the
responsibility of the auditor
A scope paragraph
o Reference to the PSAs applicable to special purpose audit engagements
o Description of the work the auditor performed
Opinion paragraph containing an expression of opinion on the financial
information
Date of the report
Auditors address
Auditors signature
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AUDITING THEORY
CPA REVIEW
2.
For the purpose of expressing negative assurance in the review report, the auditor should
obtain sufficient appropriate audit evidence primarily through inquiry and analytical
procedures to be able to draw conclusions.
3.
A review engagement provides a moderate level of assurance that the information subject
to review is free of material misstatement. This is expressed in the form of negative
assurance.
4.
In planning a review of financial statements, the auditor should obtain or update the
knowledge of the business including consideration of the entitys organization, accounting
systems, operating characteristics and the nature of its assets, liabilities, revenues, and
expenses.
5.
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6.
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.
Individual items of financial data (for example, accounts payable, accounts receivable, purchases from
related parties and sales and profits of a segment of an entity).
A financial statement (for example, a balance sheet).
A complete set of financial statements.
2.
The objective of an agreed-upon procedures engagement is for the auditor to carry out
procedures of an audit nature to which the auditor and the entity and any appropriate
third parties have agreed and to report on factual findings.
3.
As the auditor simply provides a report of the factual findings of agreed-upon procedures,
no assurance is expressed. Users of the report assess for themselves the procedures and
findings reported by the auditor and draw their own conclusions from the auditors work.
4.
The report is restricted to those parties that have agreed to procedures to be performed
since others, unaware of the reasons for the procedures, may misinterpret the results.
5.
REPORTING
6.
The report on an agreed-upon procedures engagement needs to describe the purpose and
the agreed-upon procedures of the engagement in sufficient detail to enable the reader to
understand the nature and the extent of the work performed.
7.
Title;
Addressee (ordinarily the client who engaged the auditor to perform the agreed-upon procedures);
Identification of specific financial or non-financial information to which the agreed-upon procedures
have been applied;
A statement that the procedures performed was those agreed upon with the recipient;
A statement that the engagement was performed in accordance with the Philippine Standard on Related
Services applicable to agreed upon procedures engagements;
A statement that the auditor is not independent of the entity if such is the case;
Identification of the purpose for which the agreed-upon procedures were performed;
A listing of the specific procedures performed;
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A description of the auditors factual findings including sufficient details of errors and exceptions found;
A statement that the procedures performed does not constitute either an audit or a review and, as such,
no assurance is expressed;
A statement that had the auditor performed additional procedures, an audit or a review, other matters
might have come to light that would have been reported;
A statement that the report is restricted to those parties that have agreed to the procedures to be
performed;
A statement (when applicable) that report relates only to the elements, accounts, items, or financial and
non-financial information specified and that it does not extend to the entitys financial statements taken
as a whole;
Date of the report;
Auditors address; and
Auditors signature.
2.
3.
The procedures employed are not designed and do not enable the accountant to express
any assurance on the financial information.
4.
5.
The accountant should obtain a general knowledge of the business and operations of the
entity and should be familiar with the accounting principles and practices of the industry in
which the entity operates and with the form and content of the financial information that
is appropriate in the circumstances.
6.
7.
The accountant should read the compiled information and consider whether it appears to
be appropriate in form and free from obvious material misstatements.
8.
9.
The financial information compiled by the accountant should contain a reference such as
Unaudited, Compiled without Audit or Review, or Refer to the Compilation report on
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each page of the financial information or on the front of the complete set of financial
statements.
2.
3.
4.
Hypothetical assumptions about future events and management actions which are not
necessarily expected to take place, such as when some entities are in a start-up phase or are
considering a major change in the nature of operations; or
A mixture of best-estimate and hypothetical assumptions.
Prospective financial information can include financial statement or one or more elements
of financial statements and may be prepared:
5.
6.
7.
The auditor should not express any opinion as to whether the results shown in the
prospective financial information will be achieved.
8.
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9.
The auditor should not accept, or should withdraw from, an engagement when the
assumptions are clearly unrealistic or when the auditor believes that the prospective
financial information will be inappropriate for its intended use.
10. The auditor should obtain written representations from management regarding the
intended use of the prospective financial information, the completeness of significant
management assumptions and managements acceptance of its responsibility for the
prospective financial information.
Example of an unmodified report on a forecast
We have examined the forecast (include name of the entity, the period covered by the forecast and provide suitable
identification, such as by reference to page numbers or by identifying the individual statements) in accordance with
Philippine Standard on Assurance Engagements applicable to the examination of prospective financial information.
Management is responsible for the forecast including the assumptions set out in Note X on which it is based.
Based on our examination of the evidence supporting the assumptions the assumptions, nothing has come to our
attention which causes us to believe that these assumptions do not provide a reasonable basis for the forecast.
Further, in our opinion the forecast is properly prepared on the basis of the assumptions and is presented in
accordance with Philippine Financial Reporting Standards.
Actual results are likely to be different from the forecast since anticipated events frequently do not occur as expected
and the variation may be material.
When the auditor believes that the presentation and disclosure of the prospective information is
not adequate, the auditor should express a qualified or adverse opinion or withdraw from the
engagement as appropriate.
When the auditor believes that one or more significant assumptions do not provide a reasonable
basis for the prospective financial information, the auditor should either express an adverse
opinion or withdraw from the engagement as appropriate.
When the examination is affected by conditions that preclude application of one or more
procedures considered necessary in the circumstances, the auditor should either withdraw from
the engagement or disclaim the opinion describe the scope limitation in the report on the
prospective financial information.
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AUDITING THEORY
CPA REVIEW
CODE OF PROFESSIONAL ETHICS FOR CPAs
is based on the International Code of Ethics for professional accountants developed by the
International Federation of Accountants.
Is mandatory for all CPAs and is applicable to professional services performed in the
Philippines on or after January 1, 2004.
Is divided into three parts:
Part A - applies to all professional accountants unless otherwise specified
Part B applies only to those professional accountants in public practice
Part C applies to employed professional accountants, and may also apply, in
appropriate circumstances, to accountants employed in public practice
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5. INTIMIDATION THREAT
Occurs when a member of the assurance team may be deterred from acting objectively and
exercising professional skepticism by threats, actual or perceived, from the directors, officers or
employees of an assurance client
SAFEGUARDS
1. When the threats are identified, other than those that are clearly insignificant, appropriate
safeguards should be identified and applied to eliminate the threats or reduce them to an
acceptable level. This decision should be documented
2. When the safeguards are available are insufficient to eliminate the threats to independence or
to reduce them to an acceptable level, or when a firm chooses not to eliminate the activities or
interest creating the threat, the only course of action available will be the refusal to perform, or
withdrawal from, the assurance engagement
CATEGORIES OF SAFEGUARDS
1. Safeguards created by the profession, legislation or regulation
2. Safeguards within the assurance client
3. Safeguards within the firms own systems and procedures
Safeguards created by the profession, legislation or regulation include:
a. Educational, training and experience requirements for entry into the profession
b. Continuing education requirements
c. Professional standards and monitoring and disciplinary processes
d. External review of a firms quality control systems; and
e. Legislation governing the independence requirements of the firm
Safeguards within the assurance client include the following:
a. When the assurance clients management appoints the firm, persons other than management
ratify or approve the appointment
b. The assurance client has competent employees to make managerial decisions
c. Policies and procedures that emphasize the assurance clients commitment to fair financial
reporting
d. Internal procedures that ensure objective choices in commissioning non-assurance
engagements; and
e. A corporate governance structure, such as an audit committee, that provides appropriate
oversight and communications regarding a firms services
Safeguards within the firms own systems and procedures may include FIRMWIDE safeguards such as
the following:
a. Firm leadership that stresses the importance of independence and the expectation that
members of assurance teams will act in the public interest
b. Policies and procedures to implement and monitor quality control of assurance engagements
c. Documented independence policies
d. Internal policies and procedures to monitor compliance with firm policies and procedures as
they relate to independence
e. Policies and procedures that will enable the identification of interests or relationships between
the firm or members of the assurance team and assurance client
f. Policies and procedures to monitor and, if necessary, mange the reliance on revenue received
from a single assurance client
g. Using different partners and teams with separate reporting lines for the provision of nonassurance service to an assurance client
h. Policies and procedures to prohibit individuals who are not members of the assurance team
from influencing the outcome of the assurance engagement
i. Timely communication of a firms policies and procedures, and any changes thereto, to all
partners and professional staff, including appropriate training and education thereon
j. Designating a member of senior management as responsible for overseeing the adequate
functioning of the safeguarding system
k. Means of advising partners and professional staff of those assurance clients and related entities
from which they must be independent
l. A disciplinary mechanism to promote compliance with policies and procedures; and
m. Policies and procedures to empower staff to communicate to senior levels within the firm any
issue of independence and objectivity that concerns them; this includes informing staff of the
procedures open to them
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Safeguards within the firms own systems and procedures may include ENGAGEMENT SPECIFIC
safeguards such as the following:
a. Involving an additional professional accountant to review the work done or otherwise advise as
necessary. This individual could be someone from outside the firm or network firm, or someone
with the firm or network firm who was not otherwise associated with the assurance team
b. Consulting a third party, such as a committee of independent directors, a professional
regulatory body or another professional accountant
c. Rotation of senior personnel
d. Discussing independence issues with the audit committee or others charged with governance,
e. Disclosing to audit committee, or others charged with governance, the nature of services
provided and extent of fees charged
f. Policies and procedures to ensure members of the assurance team do not make, or assume
responsibility for, management decisions for the assurance client
g. Involving another firm to perform or re-perform part of the assurance engagement
h. Involving another firm to re-perform the non-assurance service to the extent necessary to
enable to take responsibility for that service; and
i. Removing an individual from the assurance team, when that individuals financial interest or
relationships create a threat to independence
ENGAGEMENT PERIOD
1. The members of the assurance team and the firm should be independent of the assurance client
during the period of the assurance engagement
2. The period of the engagement is expected to recur, the period of the assurance services and
ends when the assurance report is issued, except when the assurance engagements is of a
recurring nature
3. If the assurance engagement s expected to recur, the period of the assurance engagement ends
with the notification by either party that the professional relationship has terminated or the
issuance of the final assurance report, whichever is later
4. In the case of an audit engagement, the engagement period includes the period covered by the
financial statements reported on by the firm
5. When an entity becomes an audit client during or after the period covered by the financial
statements that the firm will report on, the firm should consider whether any thretas to
independence may be created by:
a. Financial or business relationships with the audit client during or after the period
covered by the financial statements, but prior to the acceptance of the audit
engagement; or
b. Previous services provided to the audit client
Similarly, in the case of an assurance engagement that is not an audit engagement, the firm
should consider whether any financial or business relationships or previous services may create
threats to independence.
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