PSAs

TABLE OF CONTENTS TABLE OF CONTENTS

T

TOOPPIICCSS PPAAGGEE NNUUMMBBEERR 1.

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 Auditing an

 Auditing an

d Assurance Sta

d Assurance Sta

ndards Cou

ndards Cou

ncil

ncil

 Auditing an

 Auditing and Assurance Stan

d Assurance Standards Coun

dards Council

cil

 The AASC was established by RA 9298 (PhilippineRA 9298 (Philippine  Accountancy Act of 2

 Accountancy Act of 200!00!  The Council has "#

 The Council has "# $e$bers co$ing fro$ the following%$e$bers co$ing fro$ the following% The Council $e$bers fro$ P&CPA r

The Council $e$bers fro$ P&CPA represent the followingepresent the following sectors

sectors

The Authority Attaching to

The Authority Attaching to

Philippine Standards

Philippine Standards

The Authority Attaching to

The Authority Attaching to Philippine Standards

Philippine Standards

Standards contain basic principlesbasic principlesbasic principles and essential proceduresbasic principles and essential proceduresand essential proceduresand essential procedures

together with related guidance in the for$ of

together with related guidance in the for$ of e'planatory ande'planatory and other $aterial

other $aterial &n

&n e'e'ceceptptioionanal l cicircrcu$u$ststananceces) s) anand d auaudiditotor r $a$ay y *u*udgdge e itit ne

nececessssarary y to to dedepapart rt frfro$ o$ a a StStanandadard rd in in orordeder r to to $o$orere effecti+ely achie+e the ob*ecti+e of an audit) but the auditor effecti+ely achie+e the ob*ecti+e of an audit) but the auditor should be prepared to *ustify the departure

should be prepared to *ustify the departure

Standards need only be applied to $aterial $atters Standards need only be applied to $aterial $atters  Any li$itation of the applicab

 Any li$itation of the applicability of a specific standard isility of a specific standard is $ade clear in the Standard

$ade clear in the Standard

The Authority Attaching to

The Authority Attaching to

Practice State$ents

Practice State$ents

The Authority Attaching to

The Authority Attaching to Practice State$ents

Practice State$ents

Prraacctticice e SSttaattee$$eenntts s aarre e iissssuueed d tto o pprroo++idide e pprraacctticicaall assistance to auditors in i$ple$enting the Standards or assistance to auditors in i$ple$enting the Standards or to pro

to pro$ot$ote good prae good practictice ce TheThese Stase State$te$entents are nots are not intended to ha+e the authority

PSQCs, Framework, PSAs, PAPSs, PSREs, PSAEs, PSQCs, Framework, PSAs, PAPSs, PSREs, PSAEs, PSRSs PSRSs in effect as of December 31, 2006 in effect as of December 31, 2006 N Noo !!iitt""ee –

– PPrerefaface ce to to ththe Ie Intnteernrnatatiiononal al SStatandndarardds os on Qn Quaualilittyy Control, Auditing, Review, Other Assurance and Control, Auditing, Review, Other Assurance and Related Services and Preface to the Philippine Related Services and Preface to the Philippine Standards on Quality Control, Auditing, Review, Standards on Quality Control, Auditing, Review, Other Assurance and Related Services

Other Assurance and Related Services –

– PPhihililippppiine ne FrFraaeweworor! f! for or AsAsssururanancce "e "ngngagageeenentsts –

– ##lloossssaarry oy of $f $eerrs %s %&&eeccee''eer (r ())))((** [amended by[amended by PSA 220 (Revised)]

PSA 220 (Revised)]

P#i"i$$ine Stan%ar% on Q&a"it' Contro" (PSQC) P#i"i$$ine Stan%ar% on Q&a"it' Contro" (PSQC)

+

+ QuQualalitity Cy Coontntrorol fl foor Fr Firirs $s $hahat Pt Pererfofor r AAududitits as andnd Reviews of istorical Financial Inforation, and Reviews of istorical Financial Inforation, and Other Assurance and Related Services

Other Assurance and Related Services "ngageents

"ngageents

P#i"i$$ine Stan%ar%s on A&%itin* (PSAs) P#i"i$$ine Stan%ar%s on A&%itin* (PSAs)

+(

+()) FrFraaewoewor! or! of Phf Phililipippipine Sne Stantandadards rds on Aon Aududititiningg ()

())) O'O'-e-ectictive anve and #ed #enerneral Pal Prinrinciciplples #es #oveovernirning ang an Audn Auditit of Financial Stateents

of Financial Stateents [amend[amended by PSA 700ed by PSA 700 (Revised)]

(Revised)] (

(+)+) $e$errs os of Af Aududit it "n"ngagagegeenentsts [amend[amended by PSA 700ed by PSA 700 (Revised)] (Revised)] (() (() %Revise %Revise d* d*

Quality Control for Audits of istorical Financial Quality Control for Audits of istorical Financial

Inforation Inforation (.) (.) %Revise %Revise d* d* Audit &ocuentation Audit &ocuentation (/)

No !it"e

%Revise d ())1*

Audit of Financial Stateents

(1) Consideration of 2aws and Regulations in an Audit of Financial Stateents

(3) Counications of Audit 4atters with $hose Charged with #overnance

.)) %Revise

d*

Planning an Audit of Financial Stateents

.+1 5nderstanding the "ntity and Its "nvironent and Assessing the Ris!s of 4aterial 4isstateent

.() Audit 4ateriality [amended by PSA 240 (Revised 2005)]

..) $he Auditor0s Procedures in Response to Assessed Ris!s

/)( Audit Considerations Relating to "ntities 5sing Service Organi6ations

1)) %Revise

d*

Audit "vidence

1)+ Audit "vidence 7 Additional Considerations on Specific Ites

1)1 "8ternal Confirations

1+) Initial "ngageents77Opening 9alances 1() Analytical Procedures

1.) Audit Sapling and Other Selective $esting Procedures

1/) Audit of Accounting "stiates

No !it"e

11) Related Parties

13) Su'se;uent "vents [amended by PSA 700 (Revised)] 1<) #oing Concern

1=) 4anageent Representations [amended by PSA 240 (Revised 2005)]

3)) 5sing the >or! of Another Auditor

3+) Considering the >or! of Internal Auditing 3() 5sing the >or! of an "8pert

<)) %Revise

d*

 $he Independent Auditor0s Report on a Coplete Set of #eneral Purpose Financial Stateents

<)+ 4odifications to the Independent Auditor0s Report <+) Coparatives

<() Other Inforation in &ocuents Containing Audited Financial Stateents

=)) $he Independent Auditor0s Report on Special Purpose Audit "ngageents [amended by PSA 700

(Revised)]

P#i"i$$ine A&%itin* Practice Statements (PAPSs)

+))) Inter79an! Confiration Procedures +)))P

h

Audit "vidence – Practical Pro'les in an Audit of Financial Stateents

+))/ $he Relationship 9etween 9ang!o Sentral ng Pilipinas %9SP* and 9an!s0 "8ternal Auditors

+))1 %Revise

d*

 $he Special Consideration in the Audit of Sall "ntities

No !it"e

+)+) $he Consideration of "nvironental 4atters in the Audit of Financial Stateents

+)+( Auditing &erivative Financial Instruents [amended by PSA 220 (Revised)]

+)+. "lectronic Coerce – "ffect on the Audit of Financial Stateents

+)+/ Reporting 'y Auditors on Copliance with International Financial Reporting Standards

P#i"i$$ine Stan%ar%s on Re+iew En*a*ements (PSREs)

(/)) "ngageents to Review Financial Stateents

(previously PSA 910)

(/+) Review of Interi Financial Inforation Perfored 'y the Independent Auditor of the "ntity

P#i"i$$ine Stan%ar%s on Ass&rance En*a*ements (PSAEs)

.))) %Revise

d*

Assurance "ngageents Other $han Audits or Reviews of istorical Financial Inforation

./)) $he "8aination of Prospective Financial Inforation

(previously PSA 810)

P#i"i$$ine Stan%ar%s on Re"ate% Ser+ices (PSRSs)

//)) "ngageents to Perfor Agreed75pon Procedures Regarding Financial Inforation (previously PSA 920)

//+) "ngageents to Copile Financial Inforation

Standards that have been REPLAE! "

"% Stan%ar% New Stan%ar%

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 (()

Quality Control for Audit >or!

PSA (() %Revis ed*

Quality Control for Audits of istorical Financial Inforation PSA (.) &ocuentation PSA (.) %Revis ed* Audit &ocuentation PSA (/) %Revis ed*  $he Auditor0s Responsi'ility to Consider Fraud and "rror in an Audit of Financial Stateents PSA (/) %Revise d ())1*  $he Auditor0s Responsi'ility to Consider Fraud in an Audit of Financial Stateents PSA .)) Planning PSA .)) %Revis ed* Planning an Audit of Financial Stateents PSA $he Auditor0s Reports PSA $he Independent

<)) on Financial Stateents <)) %Revis ed* Auditor0s Report on a Coplete Set of #eneral Purpose Financial Stateents PAPS +))1  $he Special Consideration in the Audit of Sall 9usiness PAPS +))1 %Revis ed*  $he Special Consideration in the Audit of Sall "ntities PSA +)) ? PSA" .))) Assurance "ngageents PSA" .))) %Revis ed* Assurance "ngageents

Other $han Audits or Reviews of

istorical Financial Inforation

Standards that have been #$%&!RA#' "

PSA .+), @nowledge of 9usinessB

PSA /)), @Ris! Assessents and Internal ControlB

PSA /)+, @Auditing in a Coputer Inforation Syste "nvironentB

PAPS +))+, @CIS "nvironent – Stand7Alone Personal CoputersB

PAPS +))(, @CIS "nvironent – On7line Coputer SystesB PAPS +))., @CIS "nvironent – &ata'ase SystesB

PAPS +))=, @Ris! Assessents and Internal Control – CIS Characteristics and ConsiderationsB

PAPS +)), @Coputer7Assisted Audit $echni;uesB

PSA Highlights

A more comprehensive quality control requirements

PSA 240 (revised)

Requires assessment o ris! o si"niicant

misstatement

Requires communication #ith those char"ed #ith

"overnance

Requires to o$tain a #ritten mana"ement

representation

PSA 2%0 – &a#s and Re"ulation (ne#)

Requires the auditor to reco"ni'e that noncompliance $y the

entity #ith la#s and re"ulations may materially aect

the inancial statements

PSA Highlights

Provides that auditor may conclude that #ithdra#al rom

the en"a"ement is necessary #hen the entity does not

ta!e the remedial action that the auditor considers

necessary in the circumstances even #hen the

noncompliance is not material to the inancial statements

PSA 2*0 – Communication #ith +hose

Char"ed #ith ,overnance (amended $y

PSA 240 revised)

Requires the auditor to communicate audit

matters o "overnance interest arisin"

rom the audit o inancial statements

entity

PSA -.0 – /nderstandin" the ntity 1

n perormin" an

audit o inancial statements the auditor is

required to have or o$tain a !no#led"e o the

$usiness suicient to ena$le the him to identiy

and understand the events transactions and

practices that in the auditor3s ud"ment may

have a si"niicant eect on the inancial

statements or on the e5amination or audit report

PSA Highlights

PSA -20 – 6ateriality (amended $y PSA

240)

Requires the auditor to consider materiality

and its relationship #ith audit ris! #hen

conductin" an audit

PSA 400 – Ris! Assessment and nternal Control

(#ithdra#n)

Requires the auditor to o$tain an understandin" o

the accountin" and internal control systems

suicient to plan the audit and develop an

eective audit approach

+he auditor is

required also to use proessional ud"ment to

assess audit ris! and to desi"n audit procedures

to ensure it is reduced to an accepta$ly lo#

level

PSA 40. – CS nvironment (#ithdra#n)

7hen the CS are si"niicant the auditor

is required to o$tain an understandin" o

the CS environment and #hether it may

inluence the assessment ris!s

PSA Highlights

PSA 402 – ntities /sin" Service

8r"ani'ations

Requires the auditor to consider ho# a

service or"ani'ation aects the client3s

accountin" and internal control systems so

as to plan the audit and develop an

eective audit approach

PSA %009%0. – Audit vidence (revised)

7hen o$tainin" audit evidence rom tests

o control the auditor is required to

consider

the

suiciency

and

appropriateness o the audit evidence to

support the assessed level o control ris!

PSA %0% – 5ternal Conirmations

Requires the auditor to determine #hether the use o

e5ternal conirmations is necessary to o$tain

suicient appropriate audit evidence to support

certain inancial statement assertions n ma!in"

this determination the auditor should consider

materiality the assessed level o ris! and ho# the

evidence rom other planned audit procedures #ill

reduce audit ris! to an accepta$ly lo# level or the

applica$le inancial statement assertions

PSA Highlights

PSA %.0 – nitial n"a"ements – 8penin" :alances

;or initial audit en"a"ements the auditor is

required to o$tain suicient appropriate audit

evidence that<

(a) +he openin" $alances do not contain

misstatements that materially aect the

current period3s inancial statements=

PSA %.0 – nitial n"a"ements – 8penin"

:alances

($) +he prior period3s closin" $alances have $een

correctly $rou"ht or#ard to the current period

or #hen appropriate have $een restated= and

(c)

Appropriate

accountin"

policies

are

consistently applied or chan"es in accountin"

policies have $een properly accounted or and

adequately disclosed

PSA %20 – Analytical Procedures

Requires the auditor to apply analytical procedures

at the plannin" sta"e to assist in understandin"

the $usiness and in identiyin" areas o potential

ris!

PSA Highlights

+he auditor is also required to apply analytical

procedures at or near the end o the audit #hen

ormin" an overall conclusion as to #hether the

inancial statements as a #hole are consistent

#ith the auditor3s !no#led"e o the $usiness

PSA %40 – Accountin" stimates

Requires the auditor to o$tain suicient

appropriate audit evidence as to #hether

an accountin" estimate is reasona$le in the

circumstances and #hen required is

appropriately disclosed

PSA %4% – ;air >alue 6easurements and

?isclosure

Requires the auditor to o$tain an

understandin" o the entity3s process or

determinin" air value measurements and

disclosures and o the relevant control

procedures suicient to develop an

eective audit approach

PSA Highlights

PSA %%0 – Related Parties

Requires the auditor to perorm audit

procedures desi"ned to o$tain suicient

appropriate audit evidence re"ardin" the

identiication and disclosure $y mana"ement o

related parties and the eect o related

party transactions that are material to the

inancial statements

PSA %%0 – Related Parties

Requires the auditor to o$tain a #ritten

representation rom mana"ement concernin"<

(a) +he completeness o inormation provided

re"ardin" the identiication o related parties=

and

($) +he adequacy o related party disclosures in

the inancial statements

PSA %*0 – Su$sequent vents

Requires the auditor to perorm procedures

desi"ned to o$tain suicient appropriate

audit evidence that all events up to the

date o the auditor3s report that may

require adustment o or disclosure in

the inancial statements have $een

identiied

PSA Highlights

PSA %*0 – Su$sequent vents

7hen ater the date o the auditor3s report $ut

$eore the inancial statements are issued the

auditor $ecomes a#are o a act #hich may

materially aect the inancial statements the

auditor should consider #hether the inancial

statements need amendment should discuss the

matter #ith mana"ement and should ta!e the

action appropriate in the circumstances

PSA %*0 – Su$sequent vents

7hen mana"ement does not amend the

inancial statements in circumstances

#here the auditor $elieves they need to

$e amended and the auditor3s report has

not $een released to the entity the

auditor should e5press a qualiied opinion

or an adverse opinion

PSA %*0 – Su$sequent vents

7hen the auditor3s report has $een

released to the entity the auditor #ould

notiy those persons ultimately responsi$le

or the overall direction o the entity not

to issue inancial statements and the

auditor3s report thereon to third parties

PSA Highlights

PSA %*0 – Su$sequent vents

7hen ater the inancial statements have $een

issued the auditor $ecomes a#are o a act #hich

e5isted at the date o the auditor3s report and

#hich i !no#n at that date may have caused the

auditor to modiy the auditor3s report the auditor

should consider #hether the inancial statements

need revision should discuss the matter #ith

mana"ement and should ta!e the action

appropriate in the circumstances

PSA %@0 – 6ana"ement Representations (amended

$y PSA 240 revised)

Requires the auditor to o$tain evidence that

mana"ement ac!no#led"es its responsi$ility

or the air presentation o the inancial

statements in accordance #ith the relevant

inancial reportin" rame#or! and has

approved the inancial statements

PSA %@0 – 6ana"ement Representations

 mana"ement reuses to provide a

representation that the auditor considers

necessary this constitutes a scope

limitation and the auditor should e5press a

qualiied opinion or a disclaimer o opinion

PSA Highlights

PSA *00 – /sin" 7or! o Another Auditor

(revised)

Requires the principal auditor to perorm

procedures to o$tain suicient appropriate

audit evidence that the #or! o the other

auditor is adequate or the principal

auditor3s purposes in the conte5t o the

speciic assi"nment

\

PSA *.0 – Considerin" the 7or! o nternal Audit

+he e5ternal auditor should o$tain a suicient

understandin" o internal audit activities to assist in

plannin" the audit and developin" an eective audit

approach

#or! o internal auditin" the e5ternal auditor

should evaluate and test that #or! to conirm its

adequacy or the e5ternal auditor3s purposes

PSA 00 – +he AuditorBs Report (revised)

Since the auditor3s responsi$ility is to report on the

inancial statements as prepared and presented $y

mana"ement the auditor should not date the

report earlier than the date on #hich the inancial

statements

are

si"ned

or

approved

$y

mana"ement

PSA Highlights

PSA .0 – Comparatives

(a) Correspondin" i"ures #here amounts

and other disclosures or the precedin"

period are included as part o the current

period inancial statements and are

intended to $e read in relation to the

amounts and other disclosures relatin" to

the current period

PSA .0 – Comparatives

($) Comparative inancial statements #here

amounts and other disclosures or the

precedin"

period

are

included

or

comparison #ith the inancial statements

o the current period $ut do not orm

part o the current period inancial

statements

PSA 20 – normation in ?ocuments Containin" Audited

;inancial Statements (ne#)

Requires the auditor to read the other inormation to

identiy material inconsistencies #ith the audited

inancial statements

PSA Highlights

 on readin" the other inormation the auditor

identiies a material inconsistency the auditor

should determine #hether the audited inancial

statements or the other inormation needs to $e

amended

PSA @00 – Special Purpose Audit n"a"ements

(amended $y PSA 00)

Provides "uidance in connection #ith special

purpose audit en"a"ements includin"<

;inancial statements prepared in accordance #ith

a comprehensive $asis o accountin" other than

nternational Accountin" Standards or national

standards=

Speciied accounts elements o accounts or items

in a inancial statement (hereater reerred to

as reports on a component o inancial

statements)=

Compliance #ith contractual a"reements= and

Summari'ed inancial statements

,RA-./R1 , A3&T&45 A43 T6.R

,RA-./R1 , A3&T&45 A43 T6.R

S.R7&C.S

S.R7&C.S

Auditing Review Related Services

 Nature of service

Audit Review Agreed-upo !rocedures "o#pi$atio "o#parative $eve$ of assurace  provided %& t'e auditor

(ig') %ut ot a%so$ute) assurace *Reasoa%$e assurace+ ,oderate assurace *i#ited assurace+  No assurace  No assurace Report  provided !ositive assurace o assertio*s+  Negative assurace o assertio*s+ .actua$ fidigs of  procedures /detificatio of ifor#atio co#pi$ed

e+els of Assurance

e+els of Assurance

Refers to the auditors satisfaction as to the reliability of an assertion being $ade by one party for use by another party

A4,68  F65(5+6( S8(8:58s

A4,68  F65(5+6( S8(8:58s

b*ecti+e of an Audit

b*ecti+e of an Audit

The ob*ecti+e of an audit of financial state$ents is to enable the auditor to e'press an opinion whether the financial state$ents are prepared) in all $aterial respects) in accordance with an identified financial reporting fra$ewor: The phrase used to e'press the auditors opinion is ;<9s58 (69=> 65 ( :(896(;<9s58 (69=> 65 ( :(896( 9s<+8s.?

9s<+8s.?

Reasonable Assurance

Reasonable Assurance

 An audit in accordance with PSAs is designed to pro+ide reasonable assurance that the financial state$ents ta:en as a whole are free fro$ $aterial $isstate$ent

 &s a concept relating to the accu$ulation of the audit e+idence necessary for the auditor to conclude that there are no $aterial $issta$ents in the financial state$ents ta:en as a whole

 Relates to the whole audit process &nherent i$itations in an Audit% The use of testing

&nherent li$itations of any accounting and internal control syste$ That $ost audit e+idence is persuasi+e rather than conclusi+e

se of *udg$ent

Characteristic(s! of sub*ect $atter 

Responsibility for the ,inancial State$ents

Responsibility for the ,inancial State$ents

 /hile the auditor is responsible for for$ing and e'pressing an opinion on the financial state$ents) the responsibility for preparing and presenting the financial state$ents is that of the $anage$ent of the entity T (4,68  8 65(5+6( s8(8:58s ,s 58 96@ :(5(:58  68s 9s<5s6)6686s

The Overall Audit Process:

CLIENT AUDITOR   Transactions  And Other  Economic Events Control  Structure Recorded  Transactions General & `Susidiar!   Account "alances Led#er 

 Audit $lannin# (PSA 300)

 Assessin# (PSA 400)

Control Ris%  Tests o' Controls Over Transactions(

Substanti+e Tests (PSA 500/600)

f Transactions

3irect Tests of   Account ;alances  And Analytical Procedures ,inal Assess$ent f Audit Approach < Dual)$ur*ose Tests

+inancial  State$ents ,inancial State$ent Presentation pinion (PSA 700)  Audit

THE PLANNING PROCESS

 Process Planning Considerations/Relevant PSA and Auditing  Pronouncements

A Acceptig t'e gage#et  sta%$is'ig er#s of gage#et " eera$ !$aig(PSA 300)

1 va$uate t'e itegrit& of t'e #aage#et

2 Assess a%i$it& to #eet geera$$& accepted auditig stadards

1 !repare egage#et $etter 

1 derstadig t'e tit& ad its viro#et

(PSA 315)

2 "oduct pre$i#iar& aa$&tica$ procedures (PSA 520)

3 sta%$is' #ateria$it&  audit ris(PSA 320/ amended by PSA 20)

 Planning Considerations/Relevant PSA and  Auditing Pronouncements

4 Assessig t'e possi%i$it& for #ateria$ errors) fraud) ad certai t&pes of i$$ega$ acts (PSA 20/250)

5 /detif& re$ated parties  re$ated part& trasactios(PSA 550)

6 "osider ot'er p$aig issues suc' as wor of ot'ers(PSAs !00/!10/!20)

7 "osider ot'er critica$ #atters suc' as assess#et of goig-cocer assu#ptio

(PSA 5"0)

 Planning Considerations/Relevant PSA and  Auditing Pronouncements  eve$op vera$$ Audit :trateg&  !repare gage#et !$aig ,e#oradu#

1 /detif& audit o%;ectives<audit progra#s or  procedures *!:A 300+

2 =ua$it& cotro$ for audit wor *!:A 220+ 3 :c'edu$e t'e audit wor *ti#ig

cosideratios+

4 Assig professioa$ staff to t'e egage#et

A4,68 E5(:58 L889 

T 8 B(9,  D69+89s 9 8 (<<9<96(8 9<9s58(86@  s569 :(5(:58

 '4 (@ 94s8, 8(8  (4,68 8 65(5+6( s8(8:58s  ...> 6+ +:<96s 8 )((5+ s8 (s (8 ..> (5, 8 65+: s8(8:58> s8(8:58  +(5s 65 468= (5, +(s  s8(8:58 9 8 =(9 85 5,,> (5, ( s4::(9=  s6566+(58 (++45865 <6+6s (5, 89 <(5(89= 58s. W (9 <(s, 8 +569: 49 (++<8(5+ (5, 49 45,9s8(5,65  86s 5(:58 )= :(5s  86s 889. O49 (4,68 6 ) :(, 68 8 )+86@  49 <9ss65 (5 <6565 5 8 65(5+6( s8(8:58s. W 6 +5,4+8 49 (4,68 65 (++9,(5+ 68 P66<<65 S8(5,(9,s 5 A4,6865. Ts s8(5,(9,s 9469 8(8  +:<= 68 86+( 9469:58s (5, <(5 (5, <99: 8 (4,68 8 )8(65 9(s5() (ss49(5+ 89 8 65(5+6( s8(8:58s (9 9 9: :(896( :6ss8(8:58. A5 (4,68 65@@s <99:65 <9+,49s 8 )8(65 (4,68 @6,5+ ()48 8 (:458s (5, ,6s+s49s 65 8 65(5+6( s8(8:58s. T <9+,49s s+8, ,<5, 5 8 (4,689s  4,:58> 65+4,65 8 (ssss:58  8 96ss  :(896( :6ss8(8:58  8 65(5+6( s8(8:58s> 89 ,4 8 9(4, 9 999. I5 :(65 8s 96s (ssss:58s> 8 (4,689 +5s6,9s 65895( +589 9@(58 8 8 5868=s <9<(9(865 (5, (69 <9s58(865  8 65(5+6( s8(8:58s 65 9,9 8 ,s65 (4,68 <9+,49s 8(8 (9 (<<9<96(8 65 8 +69+4:s8(5+s> )48 58 9 8 <49<s  <9ss65 (5 <6565 5 8 +86@5ss  8 5868=s 65895( +589. A5 (4,68 (s 65+4,s @(4(865 8 (<<9<96(85ss  (++45865 <6+6s 4s, (5, 8 9(s5()5ss  (++45865 s86:(8s :(, )= :(5(:58> (s  (s @(4(865 8 @9( <9s58(865  8 65(5+6( s8(8:58s. B+(4s  8 8s8 5(849 (5, 89 65958 6:68(865s  (5 (4,68> 889 68 8 65958 6:68(865s  (5= (++45865 (5, 65895( +589 s=s8:> 89 6s (5 45(@6,() 96s 8(8 @5 s: :(896( :6ss8(8:58s :(= 9:(65 45,6s+@9,.

W 9:65, =4 8(8 :(5(:58 6s 9s<5s6) 9 8 <9<(9(865 (5, (69 <9s58(865  8s 65(5+6( s8(8:58s 65 (++9,(5+ 68 P66<<65 F65(5+6( R<9865 S8(5,(9,s. T6s 9s<5s6)668= 65+4,s ,s6565> 6:<:5865 (5, :(658(6565 65895( +589 9@(58 8 8 <9<(9(865 (5, (69 <9s58(865  65(5+6( s8(8:58s 8(8 (9 9 9: :(896( :6ss8(8:58> 89 ,4 8 9(4, 9 999 s+865 (5, (<<=65 (<<9<96(8 (++45865 <6+6s (5, :(65 (++45865 s86:(8s 8(8 (9 9(s5() 65 8 +69+4:s8(5+s. As <(98  49 (4,68 <9+ss>  6 94s8 9: :(5(:58 96885 +569:(865 +5+9565 9<9s58(865s :(, 8 4s 65 +55+865 68 8 (4,68. W  9(9, 8 4 +<9(865 68 =49 s8( (5,  894s8 8(8 8= 6 :( (@(6() 8 4s (8@9 9+9,s> ,+4:58(865 (5, 89 659:(865 (9 94s8, 65 +55+865 68 49 (4,68. JI5s98 (,,6865( <(9(9(< 9 9(9,65  (99(5:58s (5, )665s> (s (<<9<96(8.

$lease si#n and return the attached co*! o' this letter to indicate that it is in accordance ,ith !our understandin# o' the arran#ements 'or our audit o' the 'inancial

statements- ./0 & Co- Ac%no,led#ed on ehal' o' 

 A"C Com*an! !  si#ned(

---Name and Title Date

 PSA 315 # $nderstanding %&e 'ntity And ts 'nvironment And Assessing %&e Riss *+ ,aterial ,isstatement 

1 (Pur-ose). o esta%$is' stadards ad to provide guidace o obtaining an understanding  of t'e etit& ad its eviro#et)

including its internal control a o assessing t&e riss o+ material misstatement  i a fiacia$ state#et

2 'e auditor s'ou$d o%tai a uderstadig of t'e etit& ad its eviro#et) ic$udig its itera$ cotro$) sufficiet to idetif& ad assess t'e riss of #ateria$ #isstate#et of t'e fiacia$ state#ets w'et'er due to fraud ad error) su++icient to design and -er+orm  +urt&er audit -rocedures *!:A 240  500+

3 Reuirements o+ t&e standard.

a+  Ris assessment -rocedures ad sources o+ in+ormation a%out t'e

etit& ad its eviro#et) ic$udig its itera$ cotro$ (to discuss susce-tibility among t&e engagement team)  %+ derstadig t'e etit& ad its eviro#et) ic$udig its

itera$ cotro$ *uderstad to idetif&  assess+

c+ Assessig t'e ris of #ateria$ #isstate#et *to idetif& ad assess ris of #ateria$ #isstate#ets+

d+ "o##uicatig wit' t'ose c'arged wit' goverace ad #aage#et *#atters re$atig to itera$ cotro$+

e+ ocu#etatios *esta%$is'+  Ris assessment -rocedures.

1 'e auditor s'ou$d perfor# t'e fo$$owig ris assess#et procedures to o%tai a uderstadig of t'e etit& ad its eviro#et) ic$udig its itera$ cotro$>

a+  nuiries o+ management ad ot'ers wit'i t'e etit&?

 /@uiries towards t'ose wit' goverace

 /@uiries directed toward itera$ audit persoe$

 /@uiries of e#p$o&ees

 /@uiries directed toward i-'ouse $ega$ couse$

 /@uiries directed towards #aretig or sa$es persoe$

 %+  Analytical -rocedures

 eve$op epectatio a%out t'e p$ausi%$e re$atios'ip t'at are reasoa%$& epected to eist B !:A 520

 %servatio of etit& activities ad operatios

 /spectio of docu#ets) records ad itera$ cotro$s #aua$s

 Readig report prepared %& #aage#et ad t'ose c'arges wit' goverace

 Cisits to t'e etit&Ds pre#ises ad p$at faci$ities

 racig trasactios t'roug' t'e ifor#atio s&ste# re$evat to fiacia$ reportig *wa$t'roug's+

 *%'.

 E'e auditor iteds to use in+ormation a%out t'e etit& ad its

eviro#et obtained in -rior -eriods) t'e auditor s&ould determine 4&et&er c&anges &ave occurred  t'at #a& affect t'e re$evace of suc' ifor#atio i t'e curret audit

$nderstanding t&e 'ntity and ts 'nvironment ncluding ts nternal Control 

'e auditorDs uderstadig of t'e etit& ad its eviro#et consists o+ an understanding o+ t&e +ollo4ing as-ects.

 /dustr&) regu$ator&) ad ot'er etera$ factors) ic$udig t'e app$ica%$e +inancial re-orting +rame4or 

 Nature of the entity, including the entity’s selection and application of accounting policies.

 %;ectives ad strategies ad t'e related business riss t'at #a& resu$t i a #ateria$ #isstate#et of t'e fiacia$ perfor#ace

 ,easure#et ad review of t'e entitys +inancial -er+ormance

 /tera$ cotro$

1 'e auditor s&ould identi+y and assess t&e riss o+ material

misstatement  at t'e fiacia$ state#et $eve$) ad t'e assertios $eve$ for c$asses of trasactio) accout %a$aces) ad disc$osures

2 .or t'is purpose) t'e auditor>

  denti+ies riss t&roug&out t&e -rocess of o%taiig a uderstadig of t'e etit& ad its eviro#et) including relevant controls t&at relate to t&e riss) ad %& cosiderig t'e c$asses of trasactios) accout %a$aces) ad disc$osure i t'e .:?

  Relates t&e identi+ied riss to w'at ca go wrog at t'e assertion level

 "osiders w'et'er t'e riss are of a magnitude t'at cou$d result in a material misstatement o+ t&e 6S ad

 "osiders t'e $ie$i'ood t'at t'e riss cou$d resu$t i a #ateria$ #isstate#et of t'e .:

Communicating 7it& %&ose C&arged 7it& 8overnance and ,anagement  'e auditor s&ould mae t&ose c&arged  wit' goverace or #aage#et a4are as soon as -racticable ad at an a--ro-riate level o+ res-onsibility of #ateria$ weaess i t'e desig or i#p$e#etatio of itera$ cotro$ w'ic' 'ave co#e to t'e auditorDs attetio

 9ocumentation

The auditor should document:

 'e discussion among t&e engagement team regardig t'e susce-tibility o+ t&e entitys 6S  to material misstatements due to error or fraud) ad t'e sigificat decisio reac'ed?

  :ey elements o+ t&e understanding obtained regardig eac' of t'e aspect of t'e etit& ad its eviro#et idetified i )

ic$udig eac' of t'e itera$ cotro$ co#poets idetified i t'e ) to assess t&e riss o+ material misstatements o+ t&e 6S t'e sources o+ in+ormation fro# w'ic' t'e uderstadig was o%taied? ad t'e ris assess#et procedures?

 'e identi+ied and assessed ris  of #ateria$ #isstate#ets at t'e .: $eve$ ad at t'e assertio $eve$ as re@uired? ad

 'e riss idetified ad re$ated cotro$s eva$uated as a resu$ts of t'e re@uire#ets 

A5(=86+( <9+,49s= $eans the analysis of significant ratios and trends including the resulting in+estigation of fluctuations and relationships that are inconsistent with other rele+ant infor$ation or which de+iate fro$ predicted a$ounts

 Analytical procedures include the consideration of co$parisons of the entity>s financial infor$ation with

• Co$parable infor$ation for prior periods

•  Anticipated results of the entity) such as budgets or forecasts) or e'pectations of the auditor) such as an esti$ation of depreciation

• Si$ilar industry infor$ation) such as a co$parison of the entity>s ratio of sales to accounts recei+able with industry a+erages or with other entities of co$parable si?e in the sa$e industry

 Analytical procedures also include consideration of relationships%

•  A$ong ele$ents of financial infor$ation that would be e'pected to confor$ to a predictable pattern based on the entity>s e'perience) such as gross $argin percentages

• ;etween financial infor$ation and rele+ant non@ financial infor$ation) such as payroll costs to nu$ber of e$ployees W5 (5(=86+( <9+,49s 6,586= s6566+(58 4+84(865s 9 9(865s6<s 8(8 (9 65+5s6s858 68 89 9@(58 659:(865 9 8(8 ,@6(8 9: <9,6+8, (:458s> 8 (4,689 s4, 65@s86(8 (5, )8(65 (,4(8 <(5(865s (5, (<<9<96(8 +99)9(86@ @6,5+.

T 65@s86(865  454s4( 4+84(865s (5, 9(865s6<s 9,65(96= )65s 68 654696s  :(5(:58> , )= J(+99)9(865  :(5(:58s 9s<5ss J)+5s6,9(865  8 5, 8 (<<= 89 (4,68 <9+,49s )(s, 5 8 9s48s  s4+ 654696s E(:<s  :(889s (5 (4,689 :(= +5s6,9 9(8, 8 )4s65ss 96s 65+4, 8 65  &ndustry de+elop$ents

 4ew products and ser+ices

 .'pansion of the business

 4ew accounting reuire$ents

 Regulatory reuire$ents

 Current and prospecti+e financing reuire$ents

 se of &T

C5,6865s (5, E@58s T(8 M(= I5,6+(8 R6ss  M(896( M6ss8(8:58

 perations in regions that are econo$ically unstable) for e'a$ple) countries with significant currency de+aluation or highly inflationary econo$ies

 perations e'posed to +olatile $ar:ets) for e'a$ple) futures trading

 6igh degree of co$ple' regulation

 5oing concern and liuidity issues including loss of significant custo$ers

 Constraints on the a+ailability of capital and credit

 Changes in the industry in which the entity operates

 Changes in the supply chain

 3e+eloping or offering new products or ser+ices) or $o+ing into new lines of business

 .'panding into new locations

 Changes in the entity such as large acuisitions or reorgani?ations or other unusual e+ents

 ac: of personnel with appropriate accounting and financial reporting s:ills

 Changes in :ey personnel including departure of :ey e'ecuti+es

 /ea:nesses in internal control) especially those not addressed by $anage$ent

 &nconsistencies between the entitys &T strategy and its business strategies

 Application of new accounting pronounce$ents

 Accounting $easure$ents that in+ol+e co$ple' processes

 .+ents or transactions that in+ol+e significant $easure$ent uncertainty) including accounting esti$ates

 Pending litigation and contingent liabilities) for e'a$ple) sales warranties) financial guarantees

PSA 33%  T A4,689s P9+,49s I5 Rs<5s T Assss, R6ss

(Purpose! To establish standards and pro+ide guidance deter$ining o+erall responses and designing and perfor$ing further audit procedures to respond to the assessed ris:s of -- at the ,S and assertion le+els in a financial state$ent audit The auditors understanding of the entity and its en+iron$ent) including its internal control) and assess$ent of the ris:s of -- are described in PSA B"#

The following is an o+er+iew of the reuire$ents of this standard%

&n order to reduce audit ris: to an acceptably low le+el) the auditor should deter$ine o+erall responses to assessed ris:s at the financial state$ent le+el) and should design and perfor$ further audit procedures to respond to assessed ris:s at the assertion ris:s at the assertion le+el

 The auditor should deter$ine o+erall responses to address the ris:s of $aterial $isstate$ent at the financial state$ent le+el

o Such responses $ay include%

 .$phasi?ing to the audit tea$ the need to $aintain professional s:epticis$ in gathering and e+aluating audit e+idence

 Assigning $ore e'perienced staff or those with special s:ills or using e'perts (the assign$ent of engage$ent personnel to the particular engage$ent reflects the auditors ris: assess$ent) which is based on the auditors understanding of the entity!

 &ncorporating additional ele$ents of unpredictability in the selection of further audit procedures to be perfor$ed

 Additionally) the auditor $ay $a:e general changes to the nature) ti$ing) or e'tent of audit procedures as an o+erall response (e'a$ple) perfor$ing substanti+e procedures at period end instead of at an interi$ date!  Audit Procedures Responsi+e to ris:s of -aterial -isstate$ent at the  Assertion e+el

 The auditor should design and perfor$ further audit procedures whose nature) ti$ing) and e'tent are responsi+e to the assessed ris:s of -- at the assertion le+el

o The auditor considers such $atters as the following%

 The significance of the ris:

 The li:elihood that -- will occur

 The characteristics of the class of transaction) account balance or disclosure in+ol+ed

 The nature of the specific control used by the entity and in particular whether they $anual or auto$ated

 /hether the auditor e'pects to obtain audit e+idence to deter$ine if the entitys control

are effecti+e in pre+enting) or detecting and correcting) $aterial $isstate$ents

The nature of the audit procedures is of $ost i$portance in responding to the assessed ris:s

3ocu$entation

The auditor should docu$ent the o+erall responses to address the assessed ris: of -- at the ,S le+el an the nature) ti$ing and e'tent of the further audit procedures) the lin:age of those procedures with the assessed ris:s at the assertion le+el) and the results of the audit procedures &n addition) if the auditor plans to use audit e+idence about the operating effecti+eness of controls obtained in prior audits) the auditor should docu$ent the conclusions reached with regard to relying on such controls that were tested in a prior audit The $anner in which these $atters are docu$ented is based on the auditors professional *udg$ent (PSA 2B0!

AUDIT EVIDENCE PSA #00 D Audit .+idence (Re+ised!

The auditor should obtain sufficient appropriate audit e+idence to be able to draw reasonable conclusion on which to base the audit opinion

 Audit e+idence D is all the infor$ation used by the auditor in arri+ing at the conclusion on which the audit

opinion is based) and includes the infor$ation contained in the accounting records underlying the financial state$ents and other infor$ation

• Records of &nitial entries • Chec:s

• &n+oices • Contracts

• .lectronic ,und Transfers • edgers

• Eournal entries and other ad*ust$ents

• /or:sheets supporting cost allocations and

co$putations

ther infor$ation

• -inutes of $eetings

• Confir$ation fro$ third parties •  Analysts reports

• Co$parable data about co$petitors (bench$ar:ing! • Control $anuals

• &nfo obtained fro$ inuiry) inspection and obser+ation

Sufficient Appropriate Audit .+idence

Sufficiency is the $easure of the uantity of the audit e+idence (the greater the ris:) the $ore audit e+idence is li:ely to be reuired!

 Appropriateness is the $easure of the uality of the audit e+idence (the higher the uality) the less $ay be reuired!

Sufficiency and Appropriateness of audit e+idence are interrelated

 -anage$ent is responsible for the fair presentation of financial state$ents the reflect the nature and

operations of the entity) $anage$ent i$plicitly or

e'plicitly $a:es assertions regarding the recognition) $easure$ent) presentation and disclosure of the

+arious ele$ents of financial state$ents and related disclosures

 The auditor should use assertions for classes of

transactions) account balances) and presentation and disclosures in sufficient detail to for$ a basis for the assess$ent of ris: of $aterial $isstate$ent and the design and perfor$ance of further audit procedures

 Assertions used ! the auditor 'all into 'ollo,in# cate#ories1

 Assertions aout classes o' transactions and events 'or the *eriod under audit1

o ccurrence o Co$pleteness o Accuracy

o Cutoff 

o Classification

 Assertions aout account alances at the *eriod end1 o .'istence

o Rights and obligations o Co$pleteness

o 7aluations and allocation

 Assertions aout *resentation and disclosure1 o ccurrence and rights and obligations o Co$pleteness

o Classification and understandability o Accuracy and +aluation

AUDIT PROCEDURES FOR OBTAINING AUDIT EVIDENCE • &nspection • bser+ation • &nuiry • Confir$ation • Recalculation • Reperfor$ance •  Analytical procedures PSA $%1

AUDIT EVIDENCE  ADDITIONAL CONSIDERATION ON SPECIFIC ITEMS

This PSA co$prises the following parts%

Part A% Attendance at Physical &n+entory Counting Part ;% Confir$ation of Accounts Recei+able

(Superseded by PSA #0# D Part ; has been deleted!

Part C% &nuiry Regarding itigation and Clai$s Part 3% 7aluation and 3isclosure of ong@ter$

Part .% Seg$ent &nfor$ation

PART A A885,(5+ (8 P=s6+( I5@589= C45865 -anage$ent ordinarily establishes procedures under which in+entory is physically counted at least once a year to ser+e as a basis for the preparation of the

financial state$ents or to ascertain the reliability of the perpetual in+entory syste$

W5 65@589= 6s :(896( 8 8 65(5+6(

s8(8:58s> 8 (4,689 s4, )8(65 s46+658 (<<9<96(8 (4,68 @6,5+ 9(9,65 68s 6s85+ (5, +5,6865 )= (885,(5+ (8 <=s6+( 65@589= +45865 45ss 6:<9(+86+(). Such attendance will enable the auditor to inspect the in+entory) to obser+e co$pliance with the operation of $anage$ents

procedures for recording and controlling the results of the count and to pro+ide e+idence as to the reliability of $anage$ents procedures I 45() 8 (885, 8 <=s6+( 65@589= +458 5 8 ,(8 <(55, ,4 8 459s5 +69+4:s8(5+s> 8 (4,689 s4, 8( 9 )s9@ s: <=s6+( +458s 5 (5 (895(86@ ,(8 (5,> 5 5+ss(9=> <99: 8s8s  6589@565 89(5s(+865s. W9 (885,(5+ 6s 6:<9(+86+()> ,4 8 (+89s s4+ (s 8 5(849 (5, +(865  8 65@589=> 8 (4,689 s4, +5s6,9 89 (895(86@ <9+,49s <9@6, s46+658 (<<9<96(8 (4,68 @6,5+  6s85+ (5, +5,6865 8 +5+4,

8(8 8 (4,689 5, 58 :( 995+ 8 ( s+< 6:68(865. ,or e'a$ple) docu$entation of the

subseuent sale of specific in+entory ite$s acuired or purchased prior to the physical in+entory count $ay pro+ide sufficient appropriate audit e+idence

PART C I5469= R(9,65 L686(865 (5, C(6:s itigation and clai$s in+ol+ing an entity $ay ha+e a

$aterial effect on the financial state$ents and thus $ay be reuired to be disclosed andFor pro+ided for in the financial state$ents

T (4,689 s4, +(99= 48 <9+,49s 65 9,9 8 )+: ((9  (5= 686(865 (5, +(6:s 65@@65 8 5868= 6+ :(= (@ ( :(896( +8 5 8 65(5+6( s8(8:58s. Such procedures would include%

• -a:e appropriate inuiries of $anage$ent

including obtaining representations

• Re+iew board $inutes and correspondence with

the entitys lawyers

• .'a$ine legal e'pense accounts

• se any infor$ation obtained regarding the

entitys business including infor$ation obtained fro$ discussions with any in@house legal

depart$ent

W5 686(865 9 +(6:s (@ )5 6,5866, 9 5 8 (4,689 )6@s 8= :(= 6s8> 8

5868=s (=9s. Such co$$unication will assist in obtaining sufficient appropriate audit e+idence as to whether potentially $aterial litigation and clai$s are :nown and $anage$ents esti$ates of the financial i$plications) including costs) are reliable

T 889> 6+ s4, ) <9<(9, )=

:(5(:58 (5, s58 )= 8 (4,689> s4,

94s8 8 (=9 8 +::456+(8 ,69+8= 68 8 (4,689. /hen it is considered unli:ely that the lawyer will respond to a general inuiry) the letter would

ordinarily specify%

•  A list of litigation and clai$s

• -anage$ents assess$ent of the outco$e of the

litigation or clai$ and its esti$ate of the financial i$plications) including costs in+ol+ed

•  A reuest that the lawyer confir$ the

reasonableness of $anage$ents assess$ents and pro+ide the auditor with further infor$ation if the list is considered by the lawyer to be

inco$plete or incorrect

I :(5(:58 94ss 8 6@ 8 (4,689 <9:6ss65 8 +::456+(8 68 8 5868=s (=9s> 86s 4, ) ( s+< 6:68(865 (5, s4, 9,65(96= (, 8 ( 4(66, <6565 9 ( ,6s+(6:9  <6565. /here a lawyer refuses to respond in an appropriate $anner and the auditor is

unable to obtain sufficient appropriate audit e+idence by applying alternati+e procedures) the auditor would

consider whether there is a scope li$itation which $ay lead to a ualified opinion or a disclai$er of opinion PART D V(4(865 (5, D6s+s49  L5-89: I5@s8:58s W5 5-89: 65@s8:58s (9 :(896( 8 8 65(5+6( s8(8:58s> 8 (4,689 s4, )8(65 s46+658 (<<9<96(8 (4,68 @6,5+ 9(9,65 869 @(4(865 (5, ,6s+s49.

 Audit procedures regarding long@ter$ in+est$ents ordinarily include considering e+idence as to whether the entity has the ability to continue to hold the

in+est$ents on a long ter$ basis and discussing with $anage$ent whether the entity will continue to hold the in+est$ents as long@ter$ in+est$ents and obtaining written representations to that effect

ther procedures would ordinarily include considering related financial state$ents and other infor$ation) such as $ar:et uotations) which pro+ide an indication of +alue and co$paring such +alues to the carrying a$ount of the in+est$ents up to the date of the auditors report

PART E S:58 I59:(865

/hen seg$ent infor$ation is $aterial to the financial state$ents) the auditor should obtain sufficient

appropriate audit e+idence regarding its disclosure in accordance with generally accepted accounting

 Audit procedures regarding seg$ent infor$ation ordinarily consist of analytical procedures and other audit tests appropriate in the circu$stances

PSA $%$ E*TERNAL CONFIRMATIONS T (4,689 s4, ,89:65 89 8 4s  895( +569:(865s 6s 5+ss(9= 8 )8(65 s46+658 (<<9<96(8 (4,68 @6,5+ 8 s4<<98 +98(65 65(5+6( s8(8:58 (ss9865s. I5 :(65 86s ,89:65(865> 8 (4,689 s4, +5s6,9 :(896(68=> 8 (ssss, @  65958 (5, +589 96s> (5,  8 @6,5+ 9: 89 <(55, (4,68 <9+,49s 6 9,4+ (4,68 96s 8 (5 (++<8()=  @ 9 8 (<<6+() 65(5+6( s8(8:58 (ss9865s.

.'ternal Confir$ations are freuently used in relation to account balances and their co$ponents) but need not be restricted to these ite$s ,or e'a$ple) the auditor $ay reuest e'ternal confir$ation of the ter$s of

agree$ents or transactions an entity has with third parties ther e'a$ples of situations where e'ternal confir$ations $ay be used include the following

• ;an: balances and other infor$ation fro$

ban:ers

•  &n+entories held by third parties at bonded

warehouses for processing or on consign$ent

• Property title deeds held by lawyers or financiers

for safe custody or as security

• &n+est$ents purchased fro$ stoc:bro:ers but not

deli+ered at the balance sheet date

• oans fro$ lenders

•  Accounts payable balances

se of Positi+e and 4egati+e Confir$ations The auditor $ay use positi+e or negati+e e'ternal confir$ation reuests or a co$bination of both

 A positi+e e'ternal confir$ation reuest as:s the

respondent to reply to the auditor in all cases either by indicating the respondent>s agree$ent with the gi+en infor$ation) or by as:ing the respondent to fill in

infor$ation A response to a positi+e confir$ation reuest is ordinarily e'pected to pro+ide reliable audit e+idence There is a ris:) howe+er) that a respondent $ay reply to the confir$ation reuest without +erifying that the infor$ation is correct The auditor is not

The auditor $ay reduce this ris:) howe+er) by using positi+e confir$ation reuests that do not state the a$ount (or other infor$ation! on the confir$ation

reuest) but as: the respondent to fill in the a$ount or furnish other infor$ation n the other hand) use of this type of =blan:= confir$ation reuest $ay result in lower response rates because additional effort is

reuired of the respondents

 A negati+e e'ternal confir$ation reuest as:s the respondent to reply only in the e+ent of disagree$ent with the infor$ation pro+ided in the reuest 6owe+er) when no response has been recei+ed to a negati+e confir$ation reuest) the auditor re$ains aware that there will be no e'plicit e+idence that intended third parties ha+e recei+ed the confir$ation reuests and +erified that the infor$ation contained therein is correct  Accordingly) the use of negati+e confir$ation reuests

ordinarily pro+ides less reliable e+idence than the use of positi+e confir$ation reuests) and the auditor

considers perfor$ing other substanti+e procedures to supple$ent the use of negati+e confir$ations

4egati+e confir$ation reuests $ay be used to reduce audit ris: to an acceptable le+el when%

(a! the assessed le+el of inherent and control ris: is low

(b! a large nu$ber of s$all balances is in+ol+ed (c! a substantial nu$ber of errors is not e'pected

and

(d! the auditor has no reason to belie+e that respondents will disregard these reuests

 A co$bination of positi+e and negati+e e'ternal

confir$ations $ay be used ,or e'a$ple) where the total accounts recei+able balance co$prises a s$all nu$ber of large balances and a large nu$ber of s$all balances) the auditor $ay decide that it is appropriate to confir$ all or a sa$ple of the large balances with positi+e confir$ation reuests and a sa$ple of the s$all balances using negati+e confir$ation reuests /here no response is recei+ed) the auditor ordinarily contacts the recipient of the reuest to elicit a response /here the auditor is unable to obtain a response) the auditor uses alternati+e audit procedures The nature of alternati+e procedures +aries according to the

account and assertion in uestion &n the e'a$ination of accounts recei+able) alternati+e procedures $ay include e'a$ination of subseuent cash receipts)

e'a$ination of shipping docu$entation or other client docu$entation to pro+ide e+idence for the e'istence assertion) and sales cut off tests to pro+ide e+idence for the co$pleteness assertion

&n the e'a$ination of accounts payable) alternati+e procedures $ay include e'a$ination of subseuent cash disburse$ents or correspondence fro$ third

parties to pro+ide e+idence of the e'istence assertion) and e'a$ination of other records) such as goods

recei+ed notes) to pro+ide e+idence of the co$pleteness assertion

PSA $%$

INITIAL ENGAGEMENTS  OPENING BALANCES

F9 65686( (4,68 5(:58s> 8 (4,689 s4, )8(65 s46+658 (<<9<96(8 (4,68 @6,5+ 8(8

J( 8 <565 )((5+s , 58 +58(65 :6ss8(8:58s 8(8 :(896(= (+8 8 +49958 <96,s 65(5+6( s8(8:58s

(b! the prior period>s closing balances ha+e been

correctly brought forward to the current period or) when appropriate) ha+e been restated and

J+ (<<9<96(8 (++45865 <6+6s (9

+5s6s858= (<<6, 9 +(5s 65 (++45865 <6+6s (@ )5 <9<9= (++458, 9 (5, (,4(8= ,6s+s,.

=pening balances= $eans those account balances which e'ist at the beginning of the period pening 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 /hen the prior period>s financial state$ents were

audited by another auditor) the current auditor $ay be able to obtain sufficient appropriate audit e+idence regarding opening balances by re+iewing the

predecessor auditor>s wor:ing papers &n these

circu$stances) the current auditor would also consider the professional co$petence and independence of the predecessor auditor &f the prior period>s auditor>s

report was $odified) the auditor would pay particular attention in the current period to the $atter which resulted in the $odification

A4,68 C5+4s65s (5, R<9865

I> (89 <99:65 <9+,49s 65+4,65 8s s8 48 ()@> 8 (4,689 6s 45() 8 )8(65 s46+658 (<<9<96(8 (4,68 @6,5+ +5+9565 <565

)((5+s> 8 (4,689s 9<98 s4, 65+4, (. ( 4(66, <6565) for e'a$ple (where the ualification co+ers the balance sheet) inco$e state$ent and state$ent of cash flows!%

=/e did not obser+e the counting of the physical in+entory stated at GGG as at 3ece$ber B")

20G") since that date was prior to our

appoint$ent as auditors /e were unable to satisfy oursel+es as to the in+entory uantities at that date by other audit procedures

&n our opinion) e'cept for the effects of such ad*ust$ents) if any) as $ight ha+e been

deter$ined to be necessary had we been able to obser+e the counting of physical in+entory and satisfy oursel+es as to the opening balance of in+entory) the financial state$ents present fairly) in all $aterial respects) the financial position of H as at 3ece$ber B") 20G2) and the results of its operations and its cash flows for the year then ended in accordance with =

J) ( ,6s+(6:9  <6565 9 

*c+ 65 8s 496s,6+865 9 68 6s <9:688,> (5

<6565 6+ 6s 4(66, 9 ,6s+(6:,

s (5, 454(66, 9(9,65 65(5+6( <s6865> for e'a$ple%

=/e did not obser+e the counting of the physical in+entory stated at GGG as at 3ece$ber B")

20G") since that date was prior to our

appoint$ent as auditors /e were unable to satisfy oursel+es as to the in+entory uantities at that date by other audit procedures

;ecause of the significance of the abo+e $atter in relation to the results of the Co$pany>s

operations for the year to 3ece$ber B") 20G2) we are not in a position to) and do not) e'press an opinion on the results of its operations and its cash flows for the year then ended

&n our opinion) the balance sheet presents fairly in all $aterial respects) the financial position of the Co$pany as at 3ece$ber B") 20G2) in

accordance with =

&f the opening balances contain $isstate$ents which could $aterially affect the current period>s financial

state$ents) the auditor would infor$ $anage$ent and) after ha+ing obtained $anage$ent>s authori?ation) the predecessor auditor) if any I 8 +8  8

:6ss8(8:58 6s 58 <9<9= (++458, 9 (5, (,4(8= ,6s+s,> 8 (4,689 s4, <9ss ( 4(66, <6565 9 (5 (,@9s <6565> (s (<<9<96(8. I 8 +49958 <96,s (++45865 <6+6s (@ 58 )5 +5s6s858= (<<6, 65 9(865 8 <565 )((5+s (5, 6 8 +(5 (s 58 )5 <9<9=

(++458, 9 (5, (,4(8= ,6s+s,> 8

(4,689 s4, <9ss ( 4(66, <6565 9 (5 (,@9s <6565 (s (<<9<96(8.

PSA $!%

AUDIT OF ACCOUNTING ESTIMATES

IAccounting esti$ateJ $eans an appro'i$ation of the a$ount of an ite$ in the absence of a precise $eans of $easure$ent .'a$ples are%

•  Allowances to reduce in+entory and

accounts recei+able to their esti$ated reali?able +alue

• Pro+isions to allocate the cost of fi'ed

assets o+er their esti$ated useful li+es

•  Accrued re+enue

• 3eferred ta'

• Pro+ision for a loss fro$ a lawsuit

• osses on construction contracts in

progress

• Pro+ision to $eet warranty clai$s

T (4,689 s4, )8(65 s46+658 (<<9<96(8 (4,68 @6,5+ (s 8 89 (5 (++45865

s86:(8 6s 9(s5() 65 8 +69+4:s8(5+s (5,> 5 9469,> 6s (<<9<96(8= ,6s+s,.  The