Audit Process.

Risk Based- Audit

Approach
Before
traditional
approach.
Enron
Scandal, in which auditors are blamed.
To lessen this, approach is adjusted to
risk based audit approach.
Components of Risks

Audit- risk that the auditor may

give an unqualified opinion on FS
that are materially misstated
Engagement- economic risk that
a CPA firm is exposed to because
of a client
Financial Reporting- risk that
relate directly to the recording of
transactions and the presentation
of financial data
Business- risk that affect the
operations
and
potential
outcomes
of
organizational
activities; Business risk is broader
than
the
risk
of
material
misstatement because it includes
the
latter;
May
result
to
bankruptcy, successive losses

3 Phases (4 Steps)

Risk Assessment
o Audit Planning
o Assessing the risk of
material misstatement by
performing
Risk
Assessment
Procedures
(RAP)
Risk Response
o Determine
overall
responses and perform
Further Audit Procedures
(FAP)
FAP Includes:

TOCtest
of
operating
effectiveness
of
Internal
Control
System
Substantive TestTo detect material
misstatement
in
the FS
Reporting
o Preparation
of
Audit
Report (Issue unqualified,

qualified,
adverse
disclaimer)

or

PHASE 1-A. Performance of Preliminary

Engagement Activities
At the beginning of the current
engagement the auditor should perform
the ff activities:

Perform procedures required by

PSA 220 regarding continuance of
client relationship
Evaluate compliance with Ethical
Requirements,
including
independence
Establish an understanding of the
terms of engagement as required
by PSA 210

Client Selection and Retention.

Performing PEA helps ensure that the
auditor plans an audit engagement for
which

Auditor maintains the necessary

independence and ability to
perform the engagement
No issues with the management
integrity that may affect the
auditors willingness to continue
No misunderstanding with the
client as to the terms

Prepare and Establish Overall Audit

Strategy

To set the scope, timing and

direction of audit and guides the
implementation of the more
detailed audit plan
Important considerations
o Reporting
Objectives
(Requirements)
Time table
o Items to focus
Obtain knowledge
of
the
clients
business
Internal Control
Audit Risk
Materiality
o Scope of examination
Consider
the
financial reporting

framework used by
the client
Industry
Requirements
Information about
components, if any.
(subsidiaries)

Audit Plan

Includes nature, timing, extent of

audit procedures to be performed
by team members in order to
obtain sufficient and appropriate
evidence to reduce risks to an
acceptably low level
More detailed audit plan (Every
account has its own audit plan)
Important Contents
o Audit Objectives
o Nature. Timing and extent
of audit
o Planned audit procedures
(FAP/RAP)
o Audit Team Members
o Estimated time budget to
finish the activity

Benefits:
o Ensure
appropriate
attention is devoted to
important areas
o Aids
in
identifying
potential
problems
&
resolving them on a timely
basis
o Ensure
that
audit
is
properly
organized,
managed & performed in
an effective and efficient
manner

MATERIALITY- provides a threshold or

cut off point rather than being a primary
qualitative characteristic
peso
FS

Quantitativerelate
to
amount of the error to the

Considerations
Qualitative- relate to the
causes
of
the
misstatement

Recurring Audits
The auditor shall assess whether
circumstances require the terms of audit
engagement to be revised, such new
terms of the engagement should be in
an engagement letter or other suitable
form of written agreement

Things in Determining Threshold

If the auditor is unable to agree to a

change in the terms and is not permitted
by management to continue the original
engagement, he shall:

Withdraw from the engagement

Determine whether there is any
obligation
to
report
the
circumstances to other parties

PHASE 1-B. Planning the Audit to

Develop an Overall Audit Strategy and
Audit Plan
Nature and Scope of Audit Planning
Audit Planning- establishment of the
overall audit strategy and developing
audit plan, to reduce audit risk to an
acceptably low level

Individually or Aggregately
influence the economic decisions
of users of FS
Factors in determining materiality
level
o Nature (What caused the
misstatement), amount/
size, and timing of
misstatement)

Levels of Materiality

Overall- materiality level of the

FS as a whole
Specific- materiality level for
particular classes of transactions,
account balances or disclosures

Benchmark in determining
Materiality Level

% Total Assets/ Liabilities/ Equity/

Income/ Expense

Revenue/ Profit
Industry Practice

Re-performanceindependent execution
Analytical Procedures

auditors

Uses of Materiality Level

Determining the nature timing

and extent of audit procedures
Identify and assess material
misstatements

AUDIT PLAN shall include:

Change of Materiality Level?

Must be any of the following reasons

Change in Circumstances
New Information
Change in the Auditors
understanding of the entity and
its operations

Performance Materiality- used by the

auditor to reduce the risk to an
appropriate low level

AUDIT PROCEDURES to be performed

in RAP and FAP

Inspection- examining records of

documents
or
physical
examination of assets
o Prove:
Existence
and
Completeness
o Ways
of
performing
Inspection
100% Examination
Selecting Specific
Items
Audit Sampling
Observation- looking at the
process performed by others
Inquiry- seeking information from
knowledgeable persons, whether
within
or
outside;
used
extensively throughout the audit
and complementary to others
External Confirmation- obtaining
representations directly from third
party
Re-calculationchecking
the
mathematical accuracy of the
accounting records

Nature, timing and extent of

planned
risk
assessment
procedures (PSA 315)
Nature, timing and extent of
planned further audit procedures
at the assertion level (PSA 330)
Other planned audit procedures
o Nature- purpose and time
o Timing- period of
performance
o Extent- quantity of
procedures

Auditor shall document:

Overall audit strategy

Audit plan
Any significant changes made to
overall audit strategy during the
engagement and its reasons

Auditor shall undertake ff activities

prior to starting an initial audit:

Performing procedures required

by PSA 220 regarding acceptance
of client relationship and the
specific audit engagement
Communicating with the
predecessor auditor

Factors affecting Direction,

Supervision and Review

Size and complexity of the entity

Area of the audit
Assessed risk of material
misstatement
Capabilities and competence of
the individual team members

AUDIT EVIDENCE

All information used (not all

available evidence)
Cumulative in Nature
Auditors are not expected to
address all information available
(due to Time constraint)


Types of Audit Evidence

Accounting Records/ Underlying

Accounting Data (Whether
recorded or not)
o Records of Initial Entries
(Journal)
o Supporting Records
(Checks, Invoices &
Contracts)
o Ledgers
o Worksheets supporting
cost allocation and
computation
Other Information (Corroborating
Information)
o Minutes of the Meeting
o Confirmations from third
parties
o Analysts Reports
o Compare Data with
competitor
(Benchmarking)
o Control Manual

Important Characteristics of Audit

Evidence

Sufficiency
o Measure of quantity
Appropriateness (Competence)
o Measure of quality

Basis of Sufficiency &

Appropriateness Audit Evidence

Professional Judgement
Professional Skepticism

Additional Basis for Sufficiency

Risk of Misstatement (The higher

the risk, the more evidence is
required; Direct)
Quality of Audit Evidence (The
higher the quality, the less
evidence is required; Inverse)

Additional Basis for Appropriateness

Relevance
Reliability (Persuasiveness/
Validity)

ASSESSING RISK OF MATERIAL

MISSTATEMENT

Activities to be performed
o Obtain understanding of
the entity, its environment
including internal control
Frame of reference
to exercise
judgement
Primary
consideration if
understanding is
sufficient to assess
risk and to design
and perform further
audit procedures
Perform RAP
o Discussion among the
members of the audit
team
o Identify and assess the
risk of material
misstatement