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AUDITING THEORY
I. Topic(s):
Audit Planning, Understanding the Client/Entity, Client Acceptance, Assessing the Risk
4 Describe the nature of the risk assessment procedures that auditors use to obtain an
understanding of the client and its environment.
5 Describe the manner in which an audit is affected by the auditors' assessment of audit risk and
materiality.
6 Describe how the auditors address fraud risk.
7 Discuss how the auditors design further audit procedures in response to the assessed risks of
material misstatement.
8 Distinguish between the systems and the substantive procedures portions of the audit program.
III. Rundown
POINTS TO REMEMBER
Principal Contents
The form and content of audit engagement letters may vary for each client, but they would
generally include reference to:
• The objective of the audit of financial statements.
• Management’s responsibility for the financial statements.
• The scope of the audit, including reference to applicable legislation, regulations, or
pronouncements of professional bodies to which the auditor adheres.
• The form of any reports or other communication of results of the engagement.
• The fact that because of the test nature and other inherent limitations of an audit, together
with the inherent limitations of any accounting and internal control system, there is an
unavoidable risk that even some material misstatement may remain undiscovered.
• Unrestricted access to whatever records, documentation and other information requested
in connection with the audit.
Audits of Components
When the auditor of a parent entity is also the auditor of its subsidiary, branch or division
(component), the factors that influence the decision whether to send a separate engagement letter
to the component include:
• Who appoints the auditor of the component.
• Whether a separate audit report is to be issued on the component.
• Legal requirements.
• The extent of any work performed by other auditors.
• Degree of ownership by parent.
• Degree of independence of the component’s management.
Recurring Audits
On recurring audits, the auditor should consider whether circumstances require the terms of the
engagement to be revised and whether there is a need to remind the client of the existing terms of the
engagement.
The auditor may decide not to send a new engagement letter each period. However, the following factors
may make it appropriate to send a new letter:
• Any indication that the client misunderstands the objective and scope of the audit.
• Any revised or special terms of the engagement.
• A recent change of senior management, board of directors or ownership.
• A significant change in nature or size of the client’s business.
• Legal requirements.
Items 1 and 2 would ordinarily be considered a reasonable basis for requesting a change in the
engagement. In contrast a change would not be considered reasonable if it appeared that the
change relates to information that is incorrect, incomplete or otherwise unsatisfactory.
If the auditor is unable to agree to a change of engagement and is not permitted to continue the
original agreement:
• the auditor should withdraw; and
• consider whether there is any obligation, either contractual or otherwise, to report to other
parties, such as the board of directors or shareholders, the circumstances necessitating the withdrawal.
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BS ACCOUNTANCY (1st semester SY 2020-2019) Part 4
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA
Early appointment of the independent auditor has many advantages to both the auditor and his client.
Early appointment enables the auditor to plan his work so that it may be done expeditiously and to
determine the extent to which it can be done before the balance sheet date.
Although early appointment is preferable, an independent auditor may accept an engagement near or after
the close of the fiscal year. In such instances, before accepting the engagement, he should ascertain
whether circumstances are likely to permit an adequate audit and expression of an unqualified opinion
and, if they will not, he should discuss with the client the possible necessity for a qualified opinion or
disclaimer of opinion.
Planning
”The work is to be adequately planned and assistants, if any, are to be properly supervised.”
The auditor should plan the audit work so that the audit will be performed in an effective manner.
“Planning” means developing a general strategy and a detailed approach for the expected nature, timing
and extent of the audit. The auditor plans to perform the audit in an efficient and timely manner.
Extent of Planning
The extent of planning will vary according to the following:
1) Size of the entity;
2) Complexity of the audit; and
3) Auditor’s experience with the entity and knowledge of the business.
The auditor should develop and document an overall audit plan describing the expected scope and
conduct of the audit.
While the record of the overall audit plan will need to be sufficiently detailed to guide the development of
the audit program, its precise form and content will vary depending on the following:
1) Size of the entity;
2) Complexity of the audit; and
3) Specific methodology and technology used by the auditor.
Matters to be considered by the auditor in developing the overall audit plan include:
General economic factors and industry conditions affecting the entity’s business.
Important characteristics of the entity, its business, its financial performance and its reporting
requirements including changes since the date of the prior audit.
The general level of competence of management.
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BS ACCOUNTANCY (1st semester SY 2020-2019) Part 4
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA
The accounting policies adopted by the entity and changes in those policies.
The effect of new accounting or auditing pronouncements.
The auditor’s cumulative knowledge of the accounting and internal control systems and the relative
emphasis expected to be placed on tests of control and substantive procedures.
The expected assessments of inherent and control risks and the identification of significant audit
areas.
The setting of materiality levels for audit purposes.
The possibility of material misstatement, including the experience of past periods, or fraud.
The identification of complex accounting areas including those involving accounting estimates.
The involvement of other auditors in the audit of components, for example, subsidiaries, branches and
divisions.
The involvement of experts.
The number of locations.
Staffing requirements.
Other Matters
The possibility that the going concern assumption may be subject to question.
Conditions requiring special attention, such as the existence of related parties.
The terms of the engagement and any statutory responsibilities.
The nature and timing of reports or other communication with the entity that are expected under the
engagement.
The auditor should develop and document an audit program setting out the nature, timing and extent of
planned audit procedures required to implement the overall audit plan.
In preparing the audit program, the auditor would consider the following:
1) Specific assessments of inherent and control risks and the required level of assurance to be
provided by substantive procedures;
2) Timing of tests of controls and substantive procedures;
3) Coordination of any assistance expected from the entity, the availability of assistants and the
involvement of other auditors or experts; and
4) Other matters considered by the auditor in developing the overall audit plan need to be considered
in more detail during the development of the audit program.
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BS ACCOUNTANCY (1st semester SY 2020-2019) Part 4
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA
The overall audit plan and the audit program should be revised as necessary during the course of the
audit. Planning is continuous throughout the engagement because of changes in conditions or unexpected
results of audit procedures. The reasons for significant changes would be recorded.
Knowledge of Business
In performing an audit of financial statements, the auditor should have or obtain a knowledge of the
business sufficient to enable the auditor 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.
The level of knowledge required by the auditor would, however, ordinarily be less than that possessed by
management.
Following acceptance of the engagement, further and more detailed information would be obtained. To
the extent practicable, the auditor would obtain the required knowledge at the start of the engagement. As
the audit progresses, that information would be assessed and updated and more information would be
obtained.
The auditor can obtain knowledge of the industry and the entity from a number of sources. For example:
A knowledge of the business is a frame of reference within which the auditor exercises professional
judgment. Understanding the business and using this information appropriately assists the auditor in:
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SAINT VINCENT DE FERRER COLLEGE AUGUST 2019
BS ACCOUNTANCY (1st semester SY 2020-2019) Part 4
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA
The auditor makes judgments about many matters throughout the course of the audit where knowledge of
the business is important. For example:
The auditor should ensure that assistants assigned to an audit engagement obtain sufficient knowledge of
the business to enable them to carry out the audit work delegated to them.
To make effective use of knowledge about the business, the auditor should consider how it affects the
financial statements taken as a whole and whether the assertions in the financial statements are consistent
with the auditor’s knowledge of the business.
Audit Materiality
The auditor should consider materiality and its relationship with audit risk when conducting an audit.
“Information is material if its omission or misstatement could influence the economic decisions of users
taken on the basis of the financial statements. Materiality depends on the size of the item or error judged
in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or
cut-off point rather than being a primary qualitative characteristic which information must have if it is to
be useful.”
The auditor considers materiality at both the overall financial statement level and in relation to individual
account balances, classes of transactions and disclosures.
(a) determining the nature, timing and extent of audit procedures; and
(b) evaluating the effect of misstatements.
There is an inverse relationship between materiality and the level of audit risk, that is, the higher the
materiality level, the lower the audit risk and vice versa.
The auditor's assessment of materiality and audit risk may be different at the time of initially planning the
engagement from at the time of evaluating the results of audit procedures. This could be because of:
a change in circumstances; or
because of a change in the auditor's knowledge as a result of the audit.
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SAINT VINCENT DE FERRER COLLEGE AUGUST 2019
BS ACCOUNTANCY (1st semester SY 2020-2019) Part 4
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA
In evaluating the fair presentation of the financial statements the auditor should assess whether the
aggregate of uncorrected misstatements that have been identified during the audit is material.
The aggregate of uncorrected misstatements comprises:
(a) specific misstatements identified by the auditor including the net effect of uncorrected
misstatements identified during the audit of previous periods; and
(b) the auditor's best estimate of other misstatements which cannot be specifically identified (i.e.,
projected errors).
If the auditor concludes that the misstatements may be material the auditor needs to:
consider reducing audit risk by extending audit procedures; or
requesting management to adjust the financial statements.
If management refuses to adjust the financial statements and the results of extended audit procedures do
not enable the auditor to conclude that the aggregate of uncorrected misstatements is not material, the
auditor should consider the appropriate modification to the auditor’s report in accordance with PSA 700
“The Auditor’s Report on Financial Statements.”
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SAINT VINCENT DE FERRER COLLEGE AUGUST 2019
BS ACCOUNTANCY (1st semester SY 2020-2019) Part 4
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA
I. Topic(s):
Systems Design: Process Costing
3 Compute the cost per equivalent unit using the weighted-average method.
7 Compute the cost per equivalent unit using the FIFO method.
10 Allocate service department costs to operating departments using the direct method.
11 Allocate service department costs to operating departments using the step-down method.
III. Rundown
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SAINT VINCENT DE FERRER COLLEGE AUGUST 2019
BS ACCOUNTANCY (1st semester SY 2020-2019) Part 4
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA
THEORY OF ACCOUNTS
I. Topic(s):
RECEIVABLES, NOTES RECEIVABLE, LOANS RECEIVABLE, RECEIVABLE
FINANCING
III. Rundown
Please read the latest textbook version of “Financial Accounting Volume 1” by Valix
Trade Receivables are claims arising from sale of Merchandise or services in the
ordinary course business. The usual types are accounts receivables and notes
receivables.
Nontrade receivables represent claims arising from sources other than the sale of
merchandise or ordinary course of Business such as the following:
Trade receivables which are expected to be realized in cash within the normal
operating cycle or one year, whichever is longer, are classified as current assets.
Nontrade receivables which are expected to be realized in cash within one year,
the length of the operating cycle not with standing are classified as current asset.
If collected beyond one year, classified as non-currents assets.
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BS ACCOUNTANCY (1st semester SY 2020-2019) Part 4
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA
FOB Destination – Ownership of the goods purchased is vested in the buyer upon
receipt thereof. The seller is responsible for the freight charge up to the point of
destination.
FOB Shipping Point – Ownership of the goods purchased is vested in the buyer
upon shipment thereof. The buyer is responsible for the transportation charge
from the point of shipment to the point of destination.
Freight Collect – Freight charge on the goods shipped is not yet paid.
Freight Prepaid – Freight charge on the goods shipped is already paid by the
seller.
Allowance Method – requires recognition of a Bad debt loss if the accounts are
doubtful of collection. It conforms with matching principle and Accounts
Receivables is properly stated at NRV.
Direct with off Method – Requires recognition of a Bad bebt loss only when the
accounts proved to be worthless or uncollectible. Often used by small business
and BIR recognizes only this method.
Receivables Financing
Receivables financing is the Financial Flexibility or capability of an Enterprise to raise
money out of its receivables.
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SAINT VINCENT DE FERRER COLLEGE AUGUST 2019
BS ACCOUNTANCY (1st semester SY 2020-2019) Part 4
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA
- Means that a barrower called the assignor transfers it’s appropriate its
rights in some of its accounts receivable to a lender called the assignee in
consideration for a loan.
- Transfer the account receivable to account receivable assigned.
- Recognized the proceeds as liability and charge. Interest on the carrying
value of the liability.
- Changes in the value of the assigned receivable such as returns, write-off
and collections within or after the discount period are accounted the usual
way with a corresponding credit to the account Accounts receivable-
assigned”.
- Any Balance in the Accounts receivable-assigned is reported and
classified in the same manner for outstanding Accounts receivable.
- Assignment maybe done either on a non-notification basis where
customers are not informed that their accounts have been assigned or
notification basis where customers are notified to make their payment to
the assignee.
Factoring
- Means sale of accounts receivables on a without recourse notification
basis.
- Enterprise actually transfer ownership of it’s Accounts receivable to the
factor
- Factor assumes responsibility for uncollectible factored accounts.
- Forms of factoring
A.)Casual factoring – it is an ordinary sale assets where the difference
between the sales price and the book value of the asset sold represents gain or
loss. The loss on factoring is classified as other operating expense.
-The sale is recorded by debiting cash, allowance for doubtful accounts,
Loss of factoring if any and Crediting Accounts receivable.
Notes receivables are claims supported by formal promises to pay usually in the forms of
notes.
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BS ACCOUNTANCY (1st semester SY 2020-2019) Part 4
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA
B.) Without recourse which that means that the endorser avoids future
liability even if the maker refuses to pay the endorsee on the date of
maturity. The Notes receivables account should be credited directly
because there is no more contingent liability.
- Discounting own note.
The party discounting is the maker and therefore primary liability, not a
contingent liability, exists. In effect the party discounting entering into a
contract of loan with endorsee. The note discounted is recorded by
debiting cash, discount on Notes payable and crediting Notes payable.
The balance of the undiscounted Notes Receivable is included in (Trade and other
Receivables” presented as current asset. Notes receivable discounted with recourse should be
excluded from total receivables with disclosure of the contingent liability but if the note
receivable is without recourse notes receivable should be credited.
- Notes Receivable should be stated at their face value minus any allowance for doubtful
notes. Any accrued interest on the notes should be stated separately.
- Long Term Notes Receivable may be stated at their discounted amount when the notes
nominally bear no interest or an interest rate which is unreasonably low.
- Long Term Notes Receivable which is interest-bearing is stated at the face value.
- Short Term Notes Receivables should be stated at face amount because the difference
between the present value and face value is but very substantial.
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SAINT VINCENT DE FERRER COLLEGE AUGUST 2019
BS ACCOUNTANCY (1st semester SY 2020-2019) Part 4
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA
BUSINESS LAW
I. Topic(s):
Law on Business Transactions - Contracts
III. Rundown
Please read above topic in the latest textbook version of “Obligation and Contract” by Hector S.
De Leon
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SAINT VINCENT DE FERRER COLLEGE AUGUST 2019
BS ACCOUNTANCY (1st semester SY 2020-2019) Part 4
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA
ONLINE ASSESSMENTS
Reminders:
1. Should be submitted using excel format on or before January 15, 2019 exclusively to
saintvincentdeferrercollege@yahoo.com
2. Answers should follow below format for easy checking
a. Mutiple Choice
Multiple
Choice AT TOA MAS BL
1 a a b a
2 c a a a
3 a a b a
4 c a a a
5 a a b a
6 c
7 a
8 a
9 c
10 a
b. True or False
True or
False AT TOA MAS BL
1 True False True False
2 True False True False
3 True False True False
4 True False True False
5 True False
6 True False
7 True False
8 True False
9 True False
10 True False
c. Identification
True or
False AT TOA MAS BL
Management
1 PSA GAAP Accounting Obligatio
2 AASC
3
4
5
6
7
8
9
10
d. Problem Solving
– must write/type the solution and answer.
e. Fill in the blanks
– must write the question and answer
3. Excell file should have a file name which consists of surname, first name and part
number (Example: SantosHectorPart1, DelaCruzJuanPart1, etc.)
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SAINT VINCENT DE FERRER COLLEGE AUGUST 2019
BS ACCOUNTANCY (1st semester SY 2020-2019) Part 4
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA
QUESTIONS:
(Multiple Choice, Computation, True or False & Identification)
Auditing Theory
3. An audit plan is a:
a. Detailed plan of analytical procedures and all substantive tests to be performed in the
course of the audit.
b. Generic document that auditing firms have developed to lead the process of the audit
through a systematic and logical process.
c. Budget of the time that should be necessary to complete each phase of the audit
procedures.
d. Document that provides an overview of the company and a general plan for the audit
work to be accomplished, timing of the work, and other matters of concern to the audit.
4. Accepting an engagement to compile a financial projection for a publicly held company most
likely would be inappropriate if the projection were to be distributed to
a. All stockholders of record as of the report date.
b. A bank with which the entry is negotiating for a loan.
c. A labor union with which the entity is negotiating a contract.
d. The principal stockholder, to the exclusion of the other stockholders.
5. The use of an audit engagement letter is the best method of assuring the auditor will have
which of the following?
a. Auditor will obtain sufficient appropriate audit evidence.
b. Management representation letter
c. Cooperation from other auditors
d. Access to all books, accounts and vouchers required for audit purpose
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SAINT VINCENT DE FERRER COLLEGE AUGUST 2019
BS ACCOUNTANCY (1st semester SY 2020-2019) Part 4
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA
2. During April, 20,000 units were transferred in from department A at a cost of $39,000. Materials cost
of $6,500 and conversion cost of $9,000 were added in department B. On April 30, department B had
5,000 units of work in process 60% complete as to conversion as costs. Materials are added in the
beginning of the process in department B.
How much is the cost per equivalent unit for conversion costs?
3. During February, the Assembly department received 60,000 units from Cutting department at a unit
cost of $3.54. Costs added in the Assembly department were: materials, $41,650; labor, $101,700; and
factory overhead. $56,500. There was no beginning inventory. Of the 60,000 units received, 50,000 were
transferred out; 9,000 units were in process at the end of the month (all materials, 2/3 converted); 1,000
lost units were 1/2 complete as to materials and conversion costs. The entire loss is considered abnormal
and is to be charged to factory overhead.
4.Michael, Inc., uses a process-costing system. A newly hired accountant has identified the following
procedures that must be performed by the close of business on Friday:
Which of the following choices correctly expresses the proper order of the preceding tasks?
A. 1, 2, 3, 4.
B. 1, 2, 4, 3.
C. 1, 4, 3, 2.
D. 2, 1, 4, 3.
E. 2, 1, 3, 4.
5. Which of the following data are needed to calculate total equivalent units under the weighted-
average method?
A. Work-to-date on ending work in process, units started during the period.
B. Units completed during the period, work-to-date on ending work in process.
C. Work to complete beginning work in process, work-to-date on ending work in process.
D. Work to complete beginning work in process, units completed, work done on ending work in
process.
E. Units completed, work to complete beginning work in process.
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SAINT VINCENT DE FERRER COLLEGE AUGUST 2019
BS ACCOUNTANCY (1st semester SY 2020-2019) Part 4
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA
Theory of Accounts
1. Receivables are classified in the statement of financial position as either trade or non-trade
receivables. True or False?
Trade receivables include notes receivable and advances to officers and employees.True or False?
Ideally, a company should measure receivables in terms of their present value, that is, the
discounted value of the cash to be received in the future. True or False?
The percentage-of-sales method results in a more accurate valuation of receivables on the balance
sheet. True or False?
Companies record and report long-term notes receivable on a discounted basis. True or False?
3.
When the stated rate of interest exceeds the effective rate, the present value of the note receivable
will be less than its face value. True or False?
When buying receivables with recourse, the purchaser assumes the risk of collectibility
and absorbs any credit loss. True or False?
The receivables turnover ratio is computed by dividing net sales by the ending net
receivables. True or False?
4. Which of the following items should be included in accounts receivable reported on the statement
of financial position?
a. Notes receivable.
b. Interest receivable.
c. Allowance for doubtful accounts.
d. Advances to related parties and officers.
5.Which of the following is true when accounts receivable are factored without recourse?
a. The transaction may be accounted for either as a secured borrowing or as a sale, depending
upon the substance of the transaction.
b. The receivables are used as collateral for a promissory note issued to the factor by the owner
of the receivables.
c. The factor assumes the risk of collectibility and absorbs any credit losses in collecting the
receivables.
d. The financing cost (interest expense) should be recognized ratably over the collection period
of the receivables.
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SAINT VINCENT DE FERRER COLLEGE AUGUST 2019
BS ACCOUNTANCY (1st semester SY 2020-2019) Part 4
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA
Business Law
1. Annulment is the remedy granted by law to the contracting parties and sometimes even to
third persons in order to recover indemnity for damages caused them by a contract, even
if such contract be valid, by means of restoration of things to their condition prior to the
celebration of the contract.
Recision is the remedy granted by law, for reason of public interest, for the declaration of
the inefficacy of a contract based on a defect or vice in the consent of one of the
contracting parties in order to restore them to their original position before the contract
was executed.
2. ____________ is the rule which requires the certain agreements or some note or
memorandum thereof, shall be in writing and subscribed by the party charged or by his
agent; otherwise, such agreement shall be enforceable by action because evidence of the
same cannot be received without the writing, or a secondary evidence of its contents.
3. ____________ Class of void contract where a requisite or some of the essential requisites
of a contact are lacking or where the formalities prescribed by law or validly are not
complied with.
4. Recovery is permitted in void or illegal contracts when the law sets, or authorizes the
setting of, a minimum wage for laborers and a contract is agreed upon by which a laborer
accepts a lower wage, he shall be entitled to recover the deficiency?
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