TABLE OF CONTENTS
TOPICS PAGE NUMBER
1. THE COUNCIL
& ITS PRONOUNCEMENTS 1
2. PSA UPDATES/HIGHLIGHTS 2 - 17
2.1 LIST OF PSAs 2.2 PSA HIGHLIGHTS 3. FRAMEWORK OF AUDITING
& OTHER SERVICES 18
4. OBJECTIVE & GENERAL PRINCIPLES
GOVERNING AN AUDIT OF FS 19
5. OVERALL AUDIT PROCESS 20
6. PLANNING PROCESS 21 - 22
7. AUDIT ENGAGEMENT LETTER 22 - 24 8. UNDERSTANDING THE ENTITY
& ITS ENVIRONMENT 24 - 29
9. RESPONSE TO ASSESSED RISKS 30 - 31
11.SUBSTANTIVE AUDIT PROCEDURES 35 - 51 a. CONSIDERATIONS ON SPECIFIC ITEMS
b. EXTERNAL CONFIRMATIONS c. INITIAL
ENGAGEMENTS-OPENING BALANCES
d. AUDIT OF ACCOUNTING ESTIMATES e. AUDITING FMV MEASUREMENTS f. RELATED PARTIES
12. COMPLETING THE AUDIT AND
AND POST-AUDIT RESPONSIBILITIES 52 – 61 4.1 SUBSEQUENT EVENTS
4.2 GOING CONCERN
4.3 MANAGEMENT REPRESENTATIONS
13. THE INDEPENDENT AUDITOR’S REPORT 62 – 71 14. MODIFICATIONS TO THE INDEPENDENT
AUDITOR’S REPORT 72 – 79
The Council and Its
The Council and Its
Pronouncements
Pronouncements
Auditing and Assurance Standards Council
Auditing and Assurance Standards Council
The AASC was established by RA 9298 (PhilippineAccountancy Act of 2004)
The Council has 15 members coming from the following: The Council members from PICPA represent the following
sectors
The Authority Attaching to Philippine Standards
The Authority Attaching to Philippine Standards
Standards contain basic principles basic principles and essential proceduresand essential procedurestogether with related guidance in the form of explanatory and other material.
In exceptional circumstances, and auditor may judge it necessary to depart from a Standard in order to more effectively achieve the objective of an audit, but the auditor should be prepared to justify the departure.
Standards need only be applied to material matters.
Any limitation of the applicability of a specific standard is made clear in the Standard.
The Authority Attaching to Practice Statements
The Authority Attaching to Practice Statements
Practice Statements are issued to provide practicalassistance to auditors in implementing the Standards or to promote good practice. These Statements are not intended to have the authority of the Standards
PSQCs, Framework, PSAs, PAPSs, PSREs, PSAEs, PSRSs
in effect as of December 31, 2006
No. Title
– Preface to the International Standards on Quality Control, Auditing, Review, Other Assurance and Related Services and Preface to the Philippine Standards on Quality Control, Auditing, Review, Other Assurance and Related Services
– Philippine Framework for Assurance Engagements – Glossary of Terms (December 2002) [amended by
PSA 220 (Revised)]
Philippine Standard on Quality Control (PSQC)
1 Quality Control for Firms That Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services
Engagements
Philippine Standards on Auditing (PSAs)
120 Framework of Philippine Standards on Auditing
200 Objective and General Principles Governing an Audit of Financial Statements [amended by PSA 700
(Revised)]
210 Terms of Audit Engagements [amended by PSA 700
(Revised)]
220 (Revise
d)
Quality Control for Audits of Historical Financial Information
230 (Revise
d)
Audit Documentation
No. Title (Revise
d 2005)
Audit of Financial Statements
250 Consideration of Laws and Regulations in an Audit of Financial Statements
260 Communications of Audit Matters with Those Charged with Governance
300 (Revise
d)
Planning an Audit of Financial Statements
315 Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement 320 Audit Materiality [amended by PSA 240 (Revised
2005)]
330 The Auditor’s Procedures in Response to Assessed Risks
402 Audit Considerations Relating to Entities Using Service Organizations
500 (Revise
d)
Audit Evidence
501 Audit Evidence - Additional Considerations on Specific Items
505 External Confirmations
510 Initial Engagements--Opening Balances 520 Analytical Procedures
530 Audit Sampling and Other Selective Testing Procedures
540 Audit of Accounting Estimates
No. Title 550 Related Parties
560 Subsequent Events [amended by PSA 700 (Revised)] 570 Going Concern
580 Management Representations [amended by PSA 240
(Revised 2005)]
600 Using the Work of Another Auditor
610 Considering the Work of Internal Auditing 620 Using the Work of an Expert
700 (Revise
d)
The Independent Auditor’s Report on a Complete Set of General Purpose Financial Statements
701 Modifications to the Independent Auditor’s Report 710 Comparatives
720 Other Information in Documents Containing Audited Financial Statements
800 The Independent Auditor’s Report on Special Purpose Audit Engagements [amended by PSA 700
(Revised)]
Philippine Auditing Practice Statements (PAPSs) 1000 Inter-Bank Confirmation Procedures
1000P
h Audit Evidence – Practical Problems in an Audit of Financial Statements 1004 The Relationship Between Bangko Sentral ng Pilipinas
(BSP) and Banks’ External Auditors 1005
(Revise d)
The Special Consideration in the Audit of Small Entities
No. Title
1010 The Consideration of Environmental Matters in the Audit of Financial Statements
1012 Auditing Derivative Financial Instruments [amended
by PSA 220 (Revised)]
1013 Electronic Commerce – Effect on the Audit of Financial Statements
1014 Reporting by Auditors on Compliance with International Financial Reporting Standards Philippine Standards on Review Engagements
(PSREs)
2400 Engagements to Review Financial Statements (previously PSA 910)
2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity
Philippine Standards on Assurance Engagements (PSAEs)
3000 (Revise
d)
Assurance Engagements Other Than Audits or Reviews of Historical Financial Information
3400 The Examination of Prospective Financial Information (previously PSA 810)
Philippine Standards on Related Services (PSRSs) 4400 Engagements to Perform Agreed-Upon Procedures
Regarding Financial Information (previously PSA 920)
4410 Engagements to Compile Financial Information (previously PSA 930)
Standards that have been REPLACED :
Old Standard New Standard
Preface to Philippine Standards on Auditing and Related Services Preface to the International Standards on Quality Control, Auditing, Review, Other Assurance and Related Services and Preface to the Philippine Standards on Quality Control, Auditing, Review, Other Assurance and Related Services PSA
220 Quality Control for Audit Work PSA 220 (Revis ed)
Quality Control for Audits of Historical Financial Information PSA 230 Documentation PSA 230 (Revis ed) Audit Documentation PSA 240 (Revis ed) The Auditor’s Responsibility to Consider Fraud and Error in an Audit of Financial Statements PSA 240 (Revise d 2005) The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements PSA 300 Planning PSA 300 (Revis ed) Planning an Audit of Financial Statements PSA The Auditor’s Reports PSA The Independent
700 on Financial Statements 700 (Revis ed) Auditor’s Report on a Complete Set of General Purpose Financial Statements PAPS
1005 The Special Consideration in the Audit of Small Business PAPS 1005 (Revis ed) The Special Consideration in the Audit of Small Entities PSA 100 / PSAE 3000 Assurance Engagements PSAE 3000 (Revis ed) Assurance Engagements Other Than Audits or Reviews of Historical Financial Information
Standards that have been WITHDRAWN : PSA 310, “Knowledge of Business”
PSA 400, “Risk Assessments and Internal Control” PSA 401, “Auditing in a Computer Information System Environment”
PAPS 1001, “CIS Environment – Stand-Alone Personal Computers”
PAPS 1002, “CIS Environment – On-line Computer Systems” PAPS 1003, “CIS Environment – Database Systems”
PAPS 1008, “Risk Assessments and Internal Control – CIS Characteristics and Considerations”
PAPS 1009, “Computer-Assisted Audit Techniques”
PSA Highlights
A more comprehensive quality control requirements
PSA 240 (revised)
Requires assessment of risk of significant misstatement
Requires communication with those charged with governance
Requires to obtain a written management representation
PSA 250 – Laws and Regulation (new)
Requires the auditor to recognize that noncompliance by the entity with laws and regulations may materially affect the financial statements.
PSA Highlights
Provides that auditor may conclude that withdrawal from the engagement is necessary when the entity does not take the remedial action that the auditor considers necessary in the circumstances, even when the noncompliance is not material to the financial statements.
PSA 260 – Communication with Those
Charged with Governance (amended by
PSA 240 revised)
Requires the auditor to communicate audit
matters of governance interest arising
from the audit of financial statements
with those charged with governance of an
entity.
PSA 310 – Understanding the Entity … In performing an
audit of financial statements, the auditor is required to have or obtain a knowledge of the business sufficient to enable the him to identify and understand the events, transactions and practices that, in the auditor's judgment, may have a significant effect on the financial statements or on the examination or audit report.
PSA Highlights
PSA 320 – Materiality (amended by PSA
240)
Requires the auditor to consider materiality
and its relationship with audit risk when
conducting an audit.
PSA 400 – Risk Assessment and Internal Control
(withdrawn)
Requires the auditor to obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an effective audit approach. The auditor is required also to use professional judgment to assess audit risk and to design audit procedures
to ensure it is reduced to an acceptably low level.
PSA 401 – CIS Environment (withdrawn)
When the CIS are significant, the auditor
is required to obtain an understanding of
the CIS environment and whether it may
influence the assessment risks.
PSA Highlights
PSA 402 – Entities Using Service
Organizations
Requires the auditor to consider how a
service organization affects the client's
accounting and internal control systems so
as to plan the audit and develop an
effective audit approach.
PSA 500/501 – Audit Evidence (revised)
When obtaining audit evidence from tests
of control, the auditor is required to
consider the sufficiency and
appropriateness of the audit evidence to
support the assessed level of control risk.
PSA 505 – External ConfirmationsRequires the auditor to determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence to support certain financial statement assertions. In making this determination, the auditor should consider materiality, the assessed level of risk, and how the evidence from other planned audit procedures will reduce audit risk to an acceptably low level for the applicable financial statement assertions.
PSA Highlights
PSA 510 – Initial Engagements – Opening Balances
For initial audit engagements, the auditor is
required to obtain sufficient appropriate audit
evidence that:
(a) The opening balances do not contain
misstatements that materially affect the
current period's financial statements;
PSA 510 – Initial Engagements – Opening
Balances
(b) The prior period's closing balances have been correctly brought forward to the current period or, when appropriate, have been restated; and (c) Appropriate accounting policies are
consistently applied or changes in accounting policies have been properly accounted for and adequately disclosed.
PSA 520 – Analytical Procedures
Requires the auditor to apply analytical procedures at the planning stage to assist in understanding the business and in identifying areas of potential risk.
PSA Highlights
The auditor is also required to apply analytical procedures at or near the end of the audit when forming an overall conclusion as to whether the financial statements as a whole are consistent with the auditor's knowledge of the business.
PSA 540 – Accounting Estimates
Requires the auditor to obtain sufficient
appropriate audit evidence as to whether
an accounting estimate is reasonable in the
circumstances and, when required, is
appropriately disclosed.
PSA 545 – Fair Value Measurements and
Disclosure
Requires the auditor to obtain an
understanding of the entity's process for
determining fair value measurements and
disclosures and of the relevant control
procedures sufficient to develop an
effective audit approach.
PSA Highlights
PSA 550 – Related Parties
Requires the auditor to 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.
PSA 550 – Related Parties
Requires the auditor to 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.
PSA 560 – Subsequent Events
Requires the auditor to perform procedures
designed to obtain sufficient appropriate
audit evidence that all events up to the
date of the auditor's report that may
require adjustment of, or disclosure in,
the financial statements have been
identified.
PSA Highlights
PSA 560 – Subsequent Events
When, after the date of the auditor's report but before the financial statements are issued, the auditor becomes aware of a fact which may materially affect the financial statements, the auditor should consider whether the financial statements need amendment, should discuss the matter with management, and should take the action appropriate in the circumstances.
PSA 560 – Subsequent Events
When management does not amend the
financial statements in circumstances
where the auditor believes they need to
be amended and the auditor's report has
not been released to the entity, the
auditor should express a qualified opinion
or an adverse opinion.
PSA 560 – Subsequent Events
When the auditor's report has been
released to the entity, the auditor would
notify those persons ultimately responsible
for the overall direction of the entity not
to issue financial statements and the
auditor's report thereon to third parties.
PSA Highlights
PSA 560 – Subsequent Events
When, after the financial statements have been issued, the auditor becomes aware of a fact which existed at the date of the auditor's report and which, if known at that date, may have caused the auditor to modify the auditor's report, the auditor should consider whether the financial statements need revision, should discuss the matter with management, and should take the action appropriate in the circumstances.
PSA 580 – Management Representations (amended
by PSA 240 revised)
Requires the auditor to obtain evidence that
management acknowledges its responsibility
for the fair presentation of the financial
statements in accordance with the relevant
financial reporting framework, and has
approved the financial statements.
PSA 580 – Management Representations
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.
PSA Highlights
PSA 600 – Using Work of Another Auditor
(revised)
Requires the principal auditor to perform
procedures to obtain sufficient appropriate
audit evidence, that the work of the other
auditor is adequate for the principal
auditor's purposes, in the context of the
specific assignment.
\
PSA 610 – Considering the Work of Internal Audit
The external auditor should obtain a sufficient understanding of internal audit activities to assist in planning the audit and developing an effective audit approach.
work of internal auditing, the external auditor should evaluate and test that work to confirm its adequacy for the external auditor's purposes.
PSA 700 – The Auditor’s Report (revised)
Since the auditor's responsibility is to report on the financial statements as prepared and presented by management, the auditor should not date the report earlier than the date on which the financial statements are signed or approved by management.
PSA Highlights
PSA 710 – Comparatives
(a) Corresponding figures where amounts
and other disclosures for the preceding
period are included as part of the current
period financial statements, and are
intended to be read in relation to the
amounts and other disclosures relating to
the current period.
PSA 710 – Comparatives
(b) Comparative financial statements where
amounts and other disclosures for the
preceding period are included for
comparison with the financial statements
of the current period, but do not form
part of the current period financial
statements.
PSA 720 – Information in Documents Containing Audited Financial Statements (new)
Requires the auditor to read the other information to identify material inconsistencies with the audited financial statements.
PSA Highlights
If, on reading the other information, the auditor identifies a material inconsistency, the auditor should determine whether the audited financial statements or the other information needs to be amended.
PSA 800 – Special Purpose Audit Engagements
(amended by PSA 700)
Provides guidance in connection with special purpose audit engagements including:
Financial statements prepared in accordance with a comprehensive basis of accounting other than International Accounting Standards or national standards;
Specified accounts, elements of accounts, or items in a financial statement (hereafter referred to as reports on a component of financial statements);
Compliance with contractual agreements; and Summarized financial statements.
FRAMEWORK OF AUDITING AND OTHER
FRAMEWORK OF AUDITING AND OTHER
SERVICES
SERVICES
Auditing Review Related Services
Nature of
service Audit Review Agreed-upon Procedures Compilation Comparative level of assurance provided by the auditor
High, but not absolute, assurance (Reasonable assurance) Moderate assurance (Limited assurance) No assurance No assurance Report
provided Positive assurance on assertion(s) Negative assurance on assertion(s) Factual findings of procedures Identification of information compiled
Levels of Assurance
Levels of Assurance
Refers to the auditor’s satisfaction as to the reliability of an assertion being made by one party for use by another party
Audit of Financial Statements
Audit of Financial Statements
Objective of an Audit
Objective of an Audit
The objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework. The phrase used to express the auditor’s opinion is “present fairly, in all material“present fairly, in all material respects.”
respects.”
Reasonable Assurance
Reasonable Assurance
An audit in accordance with PSAs is designed to provide reasonable assurance that the financial statements taken as a whole are free from material misstatement.
Is a concept relating to the accumulation of the audit evidence necessary for the auditor to conclude that there are no material misstaments in the financial statements taken as a whole
Relates to the whole audit process Inherent Limitations in an Audit: The use of testing
Inherent limitations of any accounting and internal control system That most audit evidence is persuasive rather than conclusive
Use of judgment
Characteristic(s) of subject matter
Responsibility for the Financial Statements
Responsibility for the Financial Statements
While the auditor is responsible for forming and expressing an opinion on the financial statements, the responsibility for preparing and presenting the financial statements is that of the management of the entity. The audit of the financial statements does not relieve management of its responsibilities.
The Overall Audit Process:
CLIENT AUDITOR Transactions And Other Economic Events Control Structure Recorded Transactions General & `Subsidiary Account Balances Ledger
Audit Planning (PSA 300)
Assessing (PSA 400)
Control Risk (Tests of Controls Over Transactions)
Substantive Tests (PSA 500/600)
Of Transactions Direct Tests of Account Balances And Analytical Procedures Final Assessment Of Audit Approach &
Dual-Purpose Tests
Financial Statements Financial Statement Presentation Opinion (PSA 700) Audit
THE PLANNING PROCESS
Process Planning Considerations/Relevant PSA and Auditing Pronouncements A. Accepting the Engagement B. Establishing Terms of Engagement C. General Planning (PSA 300)
1. Evaluate the integrity of the management
2. Assess ability to meet generally accepted auditing standards
1. Prepare engagement letter
1. Understanding the Entity and its Environment
(PSA 315)
2. Conduct preliminary analytical procedures (PSA
520)
3. Establish materiality & audit risk (PSA 320/
amended by PSA 240)
Planning Considerations/Relevant PSA and Auditing Pronouncements
4. Assessing the possibility for material errors, fraud, and certain types of illegal acts (PSA 240/250)
5. Identify related parties & related party transactions (PSA 550)
6. Consider other planning issues such as work of others (PSAs 600/610/620) 7. Consider other critical matters such as
assessment of going-concern assumption
(PSA 570)
Planning Considerations/Relevant PSA and Auditing Pronouncements D. Develop Overall Audit Strategy E. Prepare Engagement Planning Memorandum
1. Identify audit objectives/audit programs or procedures (PSA 300)
2. Quality control for audit work (PSA 220) 3. Schedule the audit work (timing
considerations).
4. Assign professional staff to the engagement
Audit Engagement Letter
To the Board of Directors or the appropriate representative of senior management
You have requested that we audit the financial statements of ..., which comprise the balance sheet as at ……….., and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other
explanatory notes. We are pleased to confirm our acceptance and our understanding of this engagement by means of this letter. Our audit will be made with the objective of our
expressing an opinion on the financial statements.
We will conduct our audit in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial
statements.
Because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting and internal control system, there is an unavoidable risk that even some material misstatements may remain undiscovered.
We remind you that management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
As part of our audit process, we will request from management written confirmation concerning representations made to us in connection with the audit. We look forward to full cooperation with your staff and we trust that they will make available to us whatever records, documentation and other information are requested in connection with our audit. (Insert additional paragraph here regarding fee arrangements and billings, as appropriate.)
Please sign and return the attached copy of this letter to indicate that it is in accordance with your understanding of the arrangements for our audit of the financial statements.
XYZ & Co. Acknowledged on behalf of
ABC Company by (signed)
... Name and Title Date
PSA 315 - Understanding The Entity And Its Environment And Assessing The Risks Of Material Misstatement
1. (Purpose): To establish standards and to provide guidance on obtaining an understanding of the entity and its environment,
including its internal control, an on assessing the risks of material misstatement in a financial statement.
2. 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 and error, sufficient to design and perform further audit procedures. (PSA 240 & 500)
3. Requirements of the standard:
a) Risk assessment procedures and sources of information about the entity and its environment, including its internal control (to discuss susceptibility among the engagement team). b) Understanding the entity and its environment, including its internal control (understand to identify & assess).
c) Assessing the risk of material misstatement (to identify and assess risk of material misstatements).
d) Communicating with those charged with governance and management (matters relating to internal control).
e) Documentations (establish) Risk assessment procedures:
1. The auditor should perform the following risk assessment procedures to obtain an understanding of the entity and its environment, including its internal control:
a) Inquiries of management and others within the entity; Inquiries towards those with governance
Inquiries directed toward internal audit personnel Inquiries of employees
Inquiries directed toward in-house legal counsel
Inquiries directed towards marketing or sales personnel b) Analytical procedures;
Develop expectation about the plausible relationship that are reasonably expected to exist. – PSA 520
Observation of entity activities and operations
Inspection of documents, records and internal controls manuals.
Reading report prepared by management and those charges with governance.
Visits to the entity’s premises and plant facilities. Tracing transactions through the information system
relevant to financial reporting (walkthroughs) NOTE:
When auditor intends to use information about the entity and its environment obtained in prior periods, the auditor should determine whether changes have occurred that may affect the relevance of such information in the current audit.
Understanding the Entity and Its Environment, Including Its Internal Control
The auditor’s understanding of the entity and its environment consists of an understanding of the following aspects:
Industry, regulatory, and other external factors, including the applicable financial reporting framework.
Nature of the entity, including the entity’s selection and application of accounting policies.
Objectives and strategies and the related business risks that may result in a material misstatement of the financial performance
Measurement and review of the entity’s financial performance Internal control
1. The auditor should identify and assess the risks of material
misstatement at the financial statement level, and the assertions level for classes of transaction, account balances, and disclosures.
2. For this purpose, 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 disclosure in the FS;
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 FS; and
Considers the likelihood that the risks could result in a material misstatement of the FS.
Communicating With Those Charged With Governance and Management The auditor should make those charged with governance or management aware, as soon as practicable, and at an appropriate level of responsibility, of material weakness in the design or implementation of internal control which have come to the auditor’s attention.
Documentation
The auditor should document:
The discussion among the engagement team regarding the susceptibility of the entity’s FS to material misstatements due to error or fraud, and the significant decision reached;
Key elements of the understanding obtained regarding each of the aspect of the entity and its environment identified in ,
including each of the internal control components identified in the , to assess the risks of material misstatements of the FS; the sources of information from which the understanding was obtained; and the risk assessment procedures;
The identified and assessed risk of material misstatements at the FS level and at the assertion level as required; and
The risks identified and related controls evaluated as a results of the requirements .
"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.
Analytical procedures include the consideration of comparisons of the entity's financial information with
• Comparable information for prior periods.
• Anticipated results of the entity, such as budgets or forecasts, or expectations of the auditor, such as an estimation of depreciation.
• Similar industry information, such as a comparison of the entity's ratio of sales to accounts receivable with industry averages or with other entities of comparable size in the same industry.
Analytical procedures also include consideration of relationships:
• Among elements of financial information that would be expected to conform to a predictable pattern based on the entity's experience, such as gross margin percentages.
• Between financial information and relevant non-financial information, such as payroll costs to number of employees.
When analytical procedures identify significant fluctuations or relationships that are inconsistent with other relevant information or that deviate from predicted amounts, the auditor should investigate and obtain adequate explanations and appropriate corroborative evidence.
The investigation of unusual fluctuations and relationships ordinarily begins with inquiries of management, followed by:
(a)corroboration of management's responses;
(b)consideration of the need to apply other audit procedures based on the results of such inquiries Examples of matters an auditor may consider related to business risk include the following:
Industry developments New products and services Expansion of the business New accounting requirements Regulatory requirements
Current and prospective financing requirements Use of IT
Conditions and Events That May Indicate Risks of Material Misstatement
Operations in regions that are economically unstable, for example, countries with significant currency devaluation or highly inflationary economies.
Operations exposed to volatile markets, for example, futures trading.
High degree of complex regulation.
Going concern and liquidity issues including loss of significant customers.
Constraints on the availability of capital and credit. Changes in the industry in which the entity operates. Changes in the supply chain.
Developing or offering new products or services, or moving into new lines of business.
Expanding into new locations.
Changes in the entity such as large acquisitions or reorganizations or other unusual events.
Lack of personnel with appropriate accounting and financial reporting skills.
Changes in key personnel including departure of key executives.
Weaknesses in internal control, especially those not addressed by management.
Inconsistencies between the entity’s IT strategy and its business strategies.
Application of new accounting pronouncements.
Accounting measurements that involve complex processes. Events or transactions that involve significant measurement
uncertainty, including accounting estimates.
Pending litigation and contingent liabilities, for example, sales warranties, financial guarantees
PSA 330 – The Auditor’s Procedures In Response To Assessed Risks
(Purpose) To establish standards and provide guidance determining overall responses and designing and performing further audit procedures to respond to the assessed risks of MM at the FS and assertion levels in a financial statement audit. The auditor’s understanding of the entity and its environment, including its internal control, and assessment of the risks of MM are described in PSA 315.
The following is an overview of the requirements of this standard: In order to reduce audit risk to an acceptably low level, the auditor should determine overall responses to assessed risks at the financial statement level, and should design and perform further audit procedures to respond to assessed risks at the assertion risks at the assertion level.
The auditor should determine overall responses to address the risks of material misstatement at the financial statement level.
o Such responses may include:
Emphasizing to the audit team the need to maintain professional skepticism in gathering and evaluating audit evidence;
Assigning more experienced staff or those with special skills or using experts (the assignment of engagement personnel to the particular engagement reflects the auditor’s risk assessment, which is based on the auditor’s understanding of the entity)
Incorporating additional elements of unpredictability in the selection of further audit procedures to be performed
Additionally, the auditor may make general changes to the nature, timing, or extent of audit procedures as an overall response (example, performing substantive procedures at period end instead of at an interim date) Audit Procedures Responsive to risks of Material Misstatement at the Assertion Level
The auditor should design and perform further audit procedures whose nature, timing, and extent are responsive to the assessed risks of MM at the assertion level.
o The auditor considers such matters as the following: The significance of the risk
The likelihood that MM will occur
The characteristics of the class of transaction, account balance or disclosure involved
The nature of the specific control used by the entity and in particular whether they manual or automated
Whether the auditor expects to obtain audit evidence to determine if the entity’s control
are effective in preventing, or detecting and correcting, material misstatements.
The nature of the audit procedures is of most importance in responding to the assessed risks.
Documentation
The auditor should document the overall responses to address the assessed risk of MM at the FS level an 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. In addition, 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 such controls that were tested in a prior audit. The manner in which these matters are documented is based on the auditor’s professional judgment (PSA 230)
AUDIT EVIDENCE
PSA 500 – Audit Evidence (Revised)
The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusion on which to base the audit opinion
Audit evidence – is all the information used by the auditor in arriving at the conclusion on which the audit
opinion is based, and includes the information contained in the accounting records underlying the financial statements and other information.
• Records of Initial entries • Checks
• Invoices • Contracts
• Electronic Fund Transfers • Ledgers
• Journal entries and other adjustments
• Worksheets supporting cost allocations and computations
Other information • Minutes of meetings
• Confirmation from third parties • Analysts’ reports
• Comparable data about competitors (benchmarking) • Control manuals
• Info obtained from inquiry, inspection and observation
Sufficient Appropriate Audit Evidence
Sufficiency is the measure of the quantity of the audit evidence (the greater the risk, the more audit evidence is likely to be required).
Appropriateness is the measure of the quality of the audit evidence (the higher the quality, the less may be required).
Sufficiency and Appropriateness of audit evidence are interrelated.
Management is responsible for the fair presentation of financial statements the reflect the nature and
operations of the entity, management implicitly or explicitly makes assertions regarding the recognition, measurement, presentation and disclosure of the various elements of financial statements and related disclosures.
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 risk of material misstatement and the design and performance of further audit procedures.
Assertions used by the auditor fall into following categories:
Assertions about classes of transactions and events for the period under audit:
o Occurrence o Completeness o Accuracy
o Cutoff
o Classification
Assertions about account balances at the period end: o Existence
o Rights and obligations o Completeness
o Valuations and allocation
Assertions about presentation and disclosure: o Occurrence and rights and obligations o Completeness
o Classification and understandability o Accuracy and valuation
AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE • Inspection • Observation • Inquiry • Confirmation • Recalculation • Reperformance • Analytical procedures PSA 501
AUDIT EVIDENCE – ADDITIONAL CONSIDERATION ON SPECIFIC ITEMS
This PSA comprises the following parts:
Part A: Attendance at Physical Inventory Counting Part B: Confirmation of Accounts Receivable
(Superseded by PSA 505 – Part B has been deleted)
Part C: Inquiry Regarding Litigation and Claims Part D: Valuation and Disclosure of Long-term
Part E: Segment Information
PART A: Attendance at Physical Inventory Counting
Management ordinarily establishes procedures under which inventory is physically counted at least once a year to serve as a basis for the preparation of the
financial statements or to ascertain the reliability of the perpetual inventory system.
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. Such attendance will
enable the auditor to inspect the inventory, to observe compliance with the operation of management’s
procedures for recording and controlling the results of the count and to provide evidence as to the reliability of management’s procedures.
If unable to attend the physical inventory count on the date planned 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.
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. For example, documentation of the
subsequent sale of specific inventory items acquired or purchased prior to the physical inventory count may provide sufficient appropriate audit evidence.
PART C: Inquiry Regarding Litigation and Claims
Litigation and claims involving an entity may have a material effect on the financial statements and thus may be required to be disclosed and/or provided for in the financial statements.
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 entity’s lawyers.
• Examine legal expense accounts.
• Use any information obtained regarding the entity’s business including information obtained from discussions with any in-house legal
department.
When litigation or claims have been identified or when the auditor believes they may exist, the
entity’s lawyers. Such communication will assist in
obtaining sufficient appropriate audit evidence as to whether potentially material litigation and claims are known and management’s estimates of the financial implications, including costs, are reliable.
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.
• Management’s assessment of the outcome of the litigation or claim and its estimate of the financial implications, including costs involved.
• A request that the lawyer confirm the
reasonableness of management’s assessments and provide the auditor with further information if the list is considered by the lawyer to be
incomplete or incorrect.
If management refuses to give the auditor permission to communicate with the entity’s lawyers, this would be a scope limitation and should ordinarily lead to a qualified opinion or a disclaimer of opinion. Where a lawyer refuses to
respond in an appropriate manner and the auditor is unable to obtain sufficient appropriate audit evidence by applying alternative procedures, the auditor would
consider whether there is a scope limitation which may lead to a qualified opinion or a disclaimer of opinion.
PART D: Valuation and Disclosure of Long-term Investments
When long-term investments are material to the financial statements, the auditor should obtain sufficient appropriate audit evidence regarding their valuation and disclosure.
Audit procedures regarding long-term investments ordinarily include considering evidence as to whether the entity has the ability to continue to hold the
investments on a long term basis and discussing with management whether the entity will continue to hold the investments as long-term investments and obtaining written representations to that effect.
Other procedures would ordinarily include considering related financial statements and other information, such as market quotations, which provide an indication of value and comparing such values to the carrying amount of the investments up to the date of the auditor’s report.
PART E: Segment Information
When segment information is material to the financial statements, the auditor should obtain sufficient
appropriate audit evidence regarding its disclosure in accordance with generally accepted accounting
Audit procedures regarding segment information ordinarily consist of analytical procedures and other audit tests appropriate in the circumstances.
PSA 505
EXTERNAL CONFIRMATIONS
The auditor should determine whether the use of external confirmations is necessary to obtain sufficient appropriate audit evidence to support certain financial statement assertions. In making this determination, the auditor should consider materiality, the assessed level of inherent and control risk, and how the evidence from other planned audit procedures will reduce audit risk to an acceptably low level for the applicable financial statement assertions.
External Confirmations are frequently used in relation to account balances and their components, but need not be restricted to these items. For example, the auditor may request external confirmation of the terms of agreements or transactions an entity has with third parties. Other examples of situations where external confirmations may be used include the following.
• Bank balances and other information from bankers.
• Inventories held by third parties at bonded warehouses for processing or on consignment.
• Property title deeds held by lawyers or financiers for safe custody or as security.
• Investments purchased from stockbrokers but not delivered at the balance sheet date.
• Loans from lenders.
• Accounts payable balances.
Use of Positive and Negative Confirmations The auditor may use positive or negative external confirmation requests or a combination of both.
A positive external confirmation request asks the
respondent to reply to the auditor in all cases either by indicating the respondent's agreement with the given information, or by asking the respondent to fill in information. A response to a positive confirmation request is ordinarily expected to provide reliable audit evidence. There is a risk, however, that a respondent may reply to the confirmation request without verifying that the information is correct. The auditor is not
The auditor may reduce this risk, however, by using positive confirmation requests that do not state the amount (or other information) on the confirmation
request, but ask the respondent to fill in the amount or furnish other information. On the other hand, use of this type of "blank" confirmation request may result in lower response rates because additional effort is required of the respondents.
A negative external confirmation request asks the respondent to reply only in the event of disagreement with the information provided in the request. However, when no response has been received to a negative confirmation request, the auditor remains aware that there will be no explicit evidence that intended third parties have received the confirmation requests and verified that the information contained therein is correct. Accordingly, the use of negative confirmation requests ordinarily provides less reliable evidence than the use of positive confirmation requests, and the auditor
considers performing other substantive procedures to supplement the use of negative confirmations.
Negative confirmation requests may be used to reduce audit risk to an acceptable level when:
(a) the assessed level of inherent and control risk is low;
(b) a large number of small balances is involved; (c) a substantial number of errors is not expected;
and
(d) the auditor has no reason to believe that respondents will disregard these requests.
A combination of positive and negative external
confirmations may be used. For example, where the total accounts receivable balance comprises a small number of large balances and a large number of small balances, the auditor may decide that it is appropriate to confirm all or a sample of the large balances with positive confirmation requests and a sample of the small balances using negative confirmation requests. Where no response is received, the auditor ordinarily contacts the recipient of the request to elicit a response. Where the auditor is unable to obtain a response, the auditor uses alternative audit procedures. The nature of alternative procedures varies according to the
account and assertion in question. In the examination of accounts receivable, alternative procedures may include examination of subsequent cash receipts, examination of shipping documentation or other client documentation to provide evidence for the existence assertion, and sales cut off tests to provide evidence for the completeness assertion.
In the examination of accounts payable, alternative procedures may include examination of subsequent cash disbursements or correspondence from third parties to provide evidence of the existence assertion, and examination of other records, such as goods
received notes, to provide evidence of the completeness assertion.
PSA 505
INITIAL ENGAGEMENTS – OPENING BALANCES
For initial audit engagements, the auditor should obtain sufficient appropriate audit evidence that:
(a) the opening balances do not contain misstatements that materially affect the current period's financial statements;
(b) the prior period's closing balances have been correctly brought forward to the current period or, when appropriate, have been restated; and
(c) appropriate accounting policies are
consistently applied or changes in accounting policies have been properly accounted for and adequately disclosed.
"Opening balances" means those account balances which exist at the beginning of the period. Opening balances are based upon the closing balances of the prior period and reflect the effects of:
a. transactions of prior periods; and
b. accounting policies applied in the prior period. When the prior period's financial statements were audited by another auditor, the current auditor may be able to obtain sufficient appropriate audit evidence regarding opening balances by reviewing the
predecessor auditor's working papers. In these
circumstances, the current auditor would also consider the professional competence and independence of the predecessor auditor. If the prior period's auditor's
report was modified, the auditor would pay particular attention in the current period to the matter which resulted in the modification.
Audit Conclusions and Reporting
If, after performing procedures including those set out above, the auditor is unable to obtain sufficient appropriate audit evidence concerning opening balances, the auditor's report should include: a. a qualified opinion, for example (where the
qualification covers the balance sheet, income statement and statement of cash flows):
"We did not observe the counting of the physical inventory stated at XXX as at December 31, 20X1, since that date was prior to our
appointment as auditors. We were unable to satisfy ourselves as to the inventory quantities at that date 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 observe the counting of physical inventory and satisfy ourselves as to the opening balance of inventory, the financial statements present fairly, in all material respects, the financial position of ….. as at December 31, 20X2, and the results of its operations and its cash flows for the year then ended in accordance with ...";
(b) a disclaimer of opinion; or
(c) in those jurisdiction where it is permitted, an
opinion which is qualified or disclaimed
flows and unqualified regarding financial position, for example:
"We did not observe the counting of the physical inventory stated at XXX as at December 31, 20X1, since that date was prior to our
appointment as auditors. We were unable to satisfy ourselves as to the inventory quantities at that date by other audit procedures.
Because of the significance of the above matter in relation to the results of the Company's
operations for the year to December 31, 20X2, we are not in a position to, and do not, express an opinion on the results of its operations and its cash flows for the year then ended.
In our opinion, the balance sheet presents fairly in all material respects, the financial position of the Company as at December 31, 20X2, in accordance with ..."
If the opening balances contain misstatements which could materially affect the current period's financial statements, the auditor would inform management and, after having obtained management's authorization, the predecessor auditor, if any. If the effect of the
misstatement is not properly accounted for and adequately disclosed, the auditor should express a qualified opinion or an adverse opinion, as
appropriate.
If the current period's accounting policies have not been consistently applied in relation to opening balances and if the change has not been properly
accounted for and adequately disclosed, the auditor should express a qualified opinion or an adverse opinion as appropriate.
PSA 540
AUDIT OF ACCOUNTING ESTIMATES
“Accounting estimate” means an approximation of the amount of an item in the absence of a precise means of measurement. Examples are:
• Allowances to reduce inventory and accounts receivable to their estimated realizable value.
• Provisions to allocate the cost of fixed assets over their estimated useful lives.
• Accrued revenue.
• Deferred tax.
• Provision for a loss from a lawsuit.
• Losses on construction contracts in progress.
• Provision to meet warranty claims.
The auditor should obtain sufficient appropriate audit evidence as to whether an accounting
estimate is reasonable in the circumstances and, when required, is appropriately disclosed. The
evidence available to support an accounting estimate will often be more difficult to obtain and less conclusive than evidence available to support other items in the financial statements.
The auditor should adopt one or a combination of the following approaches in the audit of an
accounting estimate:
(a) review and test the process used by management to develop the estimate;
(b) use an independent estimate for comparison with that prepared by management; or
(c) review subsequent events which confirm the estimate made.
PSA 545
AUDITING FAIR MARKET VALUE MEASUREMENTS AND DISCLOSURES
The auditor should obtain sufficient appropriate audit evidence that fair value measurements and disclosures are in accordance with GAAP in the Philippines.
The auditor should evaluate whether the fair value measurements and disclosures in the financial statements are in accordance with GAAP in the Philippines.
The auditor's understanding of the requirements of
GAAP in the Philippines and knowledge of the business and industry, together with the results of other audit procedures, are used to assess whether the accounting for assets or liabilities requiring fair value
measurements is appropriate, and whether the disclosures about the fair value measurements and significant uncertainties related thereto are appropriate under GAAP in the Philippines.
Where the method for measuring fair value is specified by GAAP in the Philippines, for example, the
requirement that the fair value of a marketable security be measured using quoted market prices as opposed to using a valuation model, the auditor considers whether the measurement of fair value is consistent with that method.
PSA 550
RELATED PARTIES
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.
The auditor should review information provided by the directors and management identifying the
names of all known related parties and should perform the following procedures in respect of the completeness of this information:
a. review prior year working papers for names of known related parties;
b. review the entity's procedures for identification of related parties;
c. inquire as to the affiliation of directors and officers with other entities;
d. review shareholder records to determine the names of principal shareholders or, if
appropriate, obtain a listing of principal shareholders from the share register; e. review minutes of the meetings of
shareholders and the board of directors and other relevant statutory records such as the register of directors' interests;
f. inquire of other auditors currently involved in the audit, or predecessor auditors, as to their knowledge of additional related parties; and
g. review the entity's income tax returns and other information supplied to regulatory agencies.
During the course of the audit, the auditor needs to be alert for transactions which appear unusual in the circumstances and may indicate the existence of previously unidentified related parties. Examples include:
• Transactions which have abnormal terms of trade, such as unusual prices, interest rates, guarantees, and repayment terms.
• Transactions which lack an apparent logical business reason for their occurrence.
• Transactions in which substance differs from form.
• Transactions processed in an unusual manner.
• High volume or significant transactions with certain customers or suppliers as compared with others.
• Unrecorded transactions such as the receipt or provision of management services at no charge. During the course of the audit, the auditor carries out procedures which may identify the existence of transactions with related parties. Examples
• Performing detailed tests of transactions and balances.
• Reviewing minutes of meetings of shareholders and directors.
• Reviewing accounting records for large or unusual transactions or balances, paying
particular attention to transactions recognized at or near the end of the reporting period.
• Reviewing confirmations of loans receivable and payable and confirmations from banks. Such a review may indicate guarantor relationship and other related party transactions.
• Reviewing investment transactions, for
example, purchase or sale of an equity interest in a joint venture or other entity.
Audit Conclusions and Reporting
If 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.
COMPLETING THE AUDIT AND POST-AUDIT RESPONSIBILITIES
