Chapter 1: Professional Practice of Accountancy  Mastery of a particular intellectual skill, acquired

by training and education

Role of the professional accountant in the economy
 Adherence by its members to a common code of

 A free-market economy can exist only if there is values and conduct

sharing of accurate, reliable information among  Acceptance of a duty of society

parties that have a vested interest in the financial

performance and future prospects of an A professional accountant is an individual who holds a
organization. The market is further strengthened valid certificate issued by the Board of Accountancy.

if the data are transparent and neutral.

Scope of Practice
Five major characteristics of an ideal profession (SPCRC) a. Practice of Public Accountancy—member in an
accounting or auditing firm, render professional
1. Systematic theory
services, etc.
a. Accounting theory
b. Practice in Commerce and Industry—involved in
b. Financial accounting and reporting
decision making requiring professional
standards and practices
knowledge
c. Auditing standards
c. Practice in Education/Academe—a person in an
d. Can be achieved through formal
educational institution involving teaching
college-level education in an academic
accounting subjects
environment
d. Practice in the Government—appointed to a
2. Professional authority
position in the accounting professional group in
a. Judgment of what is good or bad for the
government or in a government-owned and/or
clients
controlled corporation
b. Based on the expertise in the systematic
theory of accounting and auditing
Requirements to Enter the Accountancy Profession
3. Community sanction
(degree—CPALE—LRR)
a. Control in the admission to the
a. Holder of BSA degree
profession
b. Qualify as a professional accountant by passing
b. A candidate must be licensed by PRC-
the CPALE administered by PRC-BOA
BOA through the CPALE
c. Satisfy all other legal and regulatory
4. Regulative code
requirements
a. Since there is monopoly in the powers
and privileges granted to the public
BSA Program (Pre-qualification education requirements)
accounting profession, abuse should be
I. Professional Accounting Education
prevented by…
a. Accounting, finance, and related
b. Rules of professional conduct
knowledge
c. Code of ethics
b. Organization and business knowledge
d. The accountancy law
c. IT knowledge and competencies
5. Culture
II. Professional Skills and General Education
a. The public accounting profession is a
PROFESSIONAL SKILLS
time-honored profession
a. Intellectual skills
b. Accounting has developed a
b. Technical and functional skills
professional culture as evidenced by
c. Personal skills
such factors as the formal norms of the
d. Interpersonal and communication skills
code of ethics, the informal rules
GENERAL EDUCATION
A profession has the following characteristics: III. Professional Values, Ethics, and Attitude
VALUES AND ATTITUDE
 a. Commitment to the public interest and accounting and reporting
sensitivity to social responsibilities systems
b. Continual improvement and lifelong B. Practical Experience
learning
c. Reliability, responsibility, timeliness, Five different areas that the professional accountant’s
courtesy, and respect mindset needs to embrace
d. Laws and regulations 1. Professionalism and ethical behavior
PROFESSIONAL ETHICS 2. Professional judgment
3. Organization and environmental awareness
 CPALE—Read more in Chapter 4 4. An investor and wider stakeholder focus
 Other Legal and Regulatory Requirements— 5. Change, uncertainty, and complexity
Read more in Chapter 4
How competencies can be developed and maintained
(specific development programs for professional
accountants):
(a) Exposure to various parts of the organization
(b) Formal and informal training, including coaching
Education and development for maintaining and and mentoring
acquiring the capabilities of professional accountants can (c) Synchronization of development with
include: organization maturity
(a) Advanced professional education pursued at
academic institutions or thru the programs of Ten (10) Insights and Directions
professional bodies 1. technology
(b) On-the-job-training and experience programs 2. Pre-certification and Lifelong Learning
(c) Off-the-job training 3. Worldwide Profession
(d) Continuing professional development courses 4. Pride in the Profession
and activities 5. Trusted Attester
6. Trusted Advisor
Competency Requirements for professional Accountants 7. Market Permissions
in Public Practice 8. Marketplace
A. Knowledge Content 9. Value Proposition
a. Audit of historical financial information 10. Demographic Shifts
at an advanced level
i. Best practices in audit Core Values and Competencies
ii. ISA & IAPS  Core values—the essential and enduring beliefs
iii. Any other applicable standards that it upholds over time. These enable CPAs to
or laws retain their unique character and value as they
b. Financial accounting and reporting at an embrace the changing dynamics of the global
advanced level economy
i. FAR processes and practices o integrity
ii. IFRS o competence
iii. Any other applicable standards o lifelong learning
or laws o objectivity
c. Information technology o commitment to excellence
i. IT systems for FAR o relevance in the global marketplace
ii. Frameworks for evaluating
controls and assessing risks in
 Core competencies—a unique combination of
human skills, knowledge, and technology that
provides value and results to the users.
o Communication skills
o Leadership skills
o Critical-thinking and problem-solving
skills
o Anticipating and serving evolving needs
o Synthesizing intelligence to insight
o Integration and collaboration
Chapter 2: Practice of Public Accountancy information upon which to make
investment decisions
Practice of Public Accountancy
o Represented in standard-setting bodies

 Scope of the practice of public accountancy such as the:

o Section 4  PFRSC (Philippine Financial

o Philippine Accountancy Act of 2004 Reporting Standards Council)

 Prohibitions on the usage of the CPA title  AASC (Auditing and Assurance
o Article IV, Section 26 Standards Council)

o Philippine Accountancy Act of 2004  PIC (Philippine Interpretations

Committee)

Certified Public Accountant

 A person who, after obtaining the required  Commission on Audit

education, passes an extensive examination and o The agency that audits or determines

is licensed by the country to practice as a whether government units handle their

professional accountant funds according to existing laws and

whether their programs are being
conducted efficiently and economically.

Regulatory and Professional Organizations  Bureau of Internal Revenue

Influencing the Profession o Responsible for the enforcement of the

tax laws, rules, and regulations.

A. Regulatory Government Agencies o Bases compliance on the National

 Professional Regulation Commission (PRC) Internal Revenue Code (NIRC)

o Administers, implements, and enforces
regulatory policies regarding licensing, B. Professional Organizations

etc.  Philippine Institute of CPAs (PICPA)

o Has jurisdiction over the Board of o The accredited national professional

Accountancy organization of CPAs

o Its authority is from the PRC o Public practice, education, government,

Modernization Act of 2000 and commerce and industry

 Board of Accountancy (BOA) o Publishes the Accountants Journal

o Consists of 1 chairman and 6 members  Other sectoral organizations (for specific

o The agency empowered to administer professional development and other

the Accountancy Law requirement of CPAs)

o Only body allowed to issue and revoke o ACPAPPAssociation of CPAs in Public

CPA certificates and grant licenses to Practice

practice o ACPAE Education

o Its authority is from the Philippine o ACPACI Commerce and Industry

Accountancy Act of 2004 o GACPA Government

 Securities and Exchange Commission (SEC)

o Regulates the registration and C. Standard-Setting Bodies

operations of corporations, partnership,  International Federation of Accountants (IFAC)

and other forms of associations of the o Approved in Munich in 1977

Philippines o Its mission is to develop and enhance

o Its overall objective is to assist in the profession to enable it to provide

providing investors with reliable services of high quality in the public

interest
 International Accounting Standards Board (IASB)
 o Based in London which began in 2001
o Funded by contributions from major
accounting companies
o Has 14 board members (12 full time)
o Committed to developing, in the public
interest, a single set of high quality,
global accounting standards that require
transparent and comparable information
in general purpose financial statements
o April 2001 IASC:IAS  IASB:IFRS
o December 2003: issued 15 revised IASs,
withdrew IAS 15 (Information Reflecting
the Effects on Changing Prices),
approved IFRS 1 to 5
o December 26, 2004: BOA approved the
adoption of IASs and IFRSs effective
January 1, 2005  PFRS
 Financial Reporting Standards Council
o Promulgates PFRS and is the accounting
standard setting body of the Philippines
o Created within 90 days after the
effectivity of the IRR to R.A. 9298
o Composed of 15 members with a
chairman
 Chairman
 BOA
 SEC
 BSP
 BIR
 Major org of preparers & users
of FS
 COA
 ACPAPP (2)
 ACPAE (2)
 ACPACI (2)
 GACPA (2)
 International Auditing Practices Committee
(IAPC)
o A standing committee of the Council of
IFAC
o Responsible for the development and
issuance on behalf of the Council
standards and statements on a variety of
audit and attests functions in order to
improve the degree of uniformity in the
world
 Auditing and Assurance Standards Council
(AASC)
o Created within 90 days after the
effectivity of the IRR to R.A. 9298
o Composed of the (17)
 Chairman
 BOA
 SEC
 BSP
 COA
 An org of CPAs in active public
practice of accountancy
 ACPAPP (9)
 ACPACI (1)
 ACPAE (1)
Types of Services of a Professional Accountant
in Public Practice (Assurance & Non-Assurance)
1. Independent financial statement audit
a. The most predominant type which is
commonly called external audit
b. Its objective is to provide a high level of
assurance that the financial statements
are free of material misstatement
c. The objective of an audit of FS is to
enable the auditor to express an opinion
whether the FS are prepared in
accordance with an identified2 FR
framework
d. “give a true and fair view”, “present fairly,
in all material respects”
e. HIGH but not absolute level of assurance
2. Reviews
a. PSREs 2400 and 2410
b. Involves limited investigation of much
narrower scope than an audit
c. Undertaken for the purpose of providing
limited (negative) assurance that the
statements are presented in accordance
with identified FRS
d. The FS reviewed may be historical or
prospective
e. Its objective is to enable the auditor to
state that nothing has come to the
auditor’s attention that causes the
auditor to believe that the FS are not
 prepared in accordance with the
frameworknegative assurance
f. MODERATE level of assurance
Other review engagements
g. Wherein a practitioner is engaged to
issue or does issue a written
communication that expresses a
conclusion with respect to the reliability
of a written assertion that is the
responsibility of another party.
h. Independent assurances about other
types of information
i. Ex. review of investment performance
statistics
3. Other assurance services (PSAE 3000)
a. Assurance Services on IT
i. CPAs can help provide
assurance on concerns over
privacy, security of information,
and the reliability of processes
generating information in a real-
time format.
b. CPA Web Trust Service
i. To provide assurance to 3 rd
party users of web sites in the
internet
ii. The Web Trust seal assures the
user that the web site owner has
met established criteria related
to business practices,
transaction integrity, and
information processes
iii. Web Trust—attestation service
iv. Web Trust seal—a symbolic
representation of the CPA’s
report on management
assertions about its disclosure of
electronic commerce practices
c. Information System Reliability Service
i. CPAs provide assurance that an
info system has been designed
and operated to produce
reliable data that protects the
system against potential data
defects
d. Assurance services on other types of
information (by the Special Committee
on Assurance Services of the AICPA)
i. Business performance
measurement
ii. Health care performance
measurement
iii. Risk assessment
iv. Eldercare Plus
Non-assurance Services
1. Agreed-upon procedures
2. Compilation
3. Tax
4. Management consultancy/advisory services
5. Accounting and data processing
6. Other non-assurance services
Assurance Engagements
 Nature
o Assurance (PFAE, 2006)—the auditor’s
satisfaction as to the reliability of an
assertion being made by one party for
use by another party
o The auditor assesses collected evidence
and expresses a conclusion
o Assurance engagement—an
engagement where a practitioner
expresses conclusion to enhance the
degree of confidence that intended
users can have about the audited
statements of a company
 Objective
o For a professional accountant to
evaluate or measure a subject matter
that is the responsibility of another party
against identified suitable criteria; and
o To express a conclusion that provides
the intended user with a level of
assurance about that subject matter
o ____
o Level of assurance provided by the
auditor’s conclusion conveys the degree
of confidence placed by the user.
 Assertion-Based Engagements
vs. Direct Reporting Engagements
o Assertion-based engagements
  evaluation or measurement of
the subject matter by the
responsible party
 the assertion by the responsible
party is made available to the
intended users
 ex. IFSA
o Direct reporting engagement
 Where the practitioner either
directly performs the evaluation
or measurement of the subject
matter, or
 obtains a representation from
the responsible party that has
performed the evaluation or
measurement that is not
available to the intended users
If the measurement of subject matter is given by the
responsible party, it takes the form of assertions if it is
disclosed to the intended users and then practitioner is
asked to affirm such assertions of the responsible party.
Such assurance engagement is attestation engagement.
Another name for attestation engagement is assertion-
based engagement as practitioner express his opinion
about assertions fairness.
However, if the practitioner performs the measurement of
subject matter himself OR obtains the representation from
the responsible party who has conducted the
measurement of subject matter where such evaluation
was not disclosed to intended users by the responsible
party then measurement of subject matter will be
provided by the practitioner in his assurance report to
intended users. Such engagements are called direct
reporting engagements.
Types of Assurance Engagements
(based on PFAE)
1. Reasonable assurance engagement
a. Not absolute
b. Aims to reduce the assurance
engagement risk to an acceptably low
level
c. Positive form (“Yes, followed the
standards.”)
2. Limited assurance engagement
a. Aims to reduce the assurance
engagement risk to a level that is
acceptable in the circumstance of the
engagement
b. Risk is greater than for a reasonable
assurance engagement
c. Negative form (“No, there are no
errors.”)
3. Other assurance services
a. CPA Web Trust
b. Eldercare Plus
c. Business Performance Measurement
Services
d. Information Reliability Services
Elements of an Assurance Engagement (3SSSW)
1. A three-party relationship involving the
practitioner, responsible party, and intended
users;
2. an appropriate subject matter;
3. suitable criteria;
4. sufficient appropriate evidence;
5. a written assurance report in the form
appropriate to a reasonable or limited assurance
engagement
A Three-Party Relationship
 Practitioner
o The person who provides the assurance
to the intended users about a subject
matter that is the responsibility of
another party.
o The term is broader than “auditor”
(refers to practitioners performing audit
or review engagements with respect to
historical financial information)
 Responsible party
o In a direct-reporting engagement—
responsible for the subject matter
o In an assertion-based management—
responsible for the subject matter
information (the assertion) and also for
the subject matter
  Intended users
o Are the people for whom the
practitioner prepares the assurance
report
Appropriate Subject Matter
 Can take any forms such as
o Financial performance or conditions
o Non-financial performance or conditions
o Physical characteristics
o Systems and processes
o Behavior
 Characteristics of the subject matter (degree of
objectivity vs subjectivity, etc.) affect the:
o Precision of the evaluation of the subject
matter
o Persuasiveness of available evidence
 An appropriate subject matter is:
o Identifiable and capable of consistent
eval or msrmt against the identified
criteria
o Such that the info about it can be
subjected to procedures for gathering
SAE
Suitable Criteria
 Are benchmarks used to evaluate or measure the
subject matter including benchmarks for
presentation and disclosure
 Criteria may be:
o Formal
o Established internal control
framework/objectives specifically
designed for engagements
o Applicable law, regulation, or contract
 Should exhibit the following characteristics:
o Relevance: assist decision-making
o Completeness: relevant factors are not
omitted
o Reliability: allow reasonably consistent
evaluation or measurement of the
subject matter
o Neutrality: free from bias
o Understandability: conclusions that are
clear, comprehensive, and not subject to
significantly different interpretations
 Criteria are made available to the intended users
in one or more of the following ways:
(a) Publicly
(b) Through inclusion in a clear manner in
the presentation of the subject matter
information
(c) Through inclusion in a clear manner in
the assurance report
(d) By general understanding (e.g. general
measurement of time)
Sufficient Appropriate Evidence
(The practitioner plans and performs an assurance
engagement with an attitude of professional skepticism
to obtain sufficient appropriate evidence) The
practitioner considers (1) materiality, (2) assurance
engagement risk, and the (3) quantity and quality of
available evidence when planning and performing the
engagement.
 Professional Skepticism
o Means that the practitioner makes a
critical assessment, with a questioning
mind, of the validity of evidence
obtained and is alert to evidence that
contradicts or brings into question the
reliability of documents ore
representations by the responsible party
o Recognizing that circumstances may
exist that cause the subject matter
information to be materially misstated
 Sufficiency and Appropriateness of Evidence
o Sufficiency is the measure of the
quantity of evidence
 Risk of material misstatement
 Quality
o Appropriateness is the measure of the
quality of evidence
 Relevance
 Reliability
 Influenced by its source
 And nature
o The greater the risk, the more evidence
is likely to be required
o The higher the quality, the less may be
required
 Materiality
 o Relevant when the practitioner
determines the nature, timing, and
extent of evidence-gathering
procedures, and when assessing whether
the subject matter information is free of
misstatement
 Assurance Engagement Risk
o The risk that the practitioner expresses
an inappropriate conclusion when the
subject matter information is materially
misstated
o The risk that the subject matter
information is materially misstated
 Inherent risk: susceptibility to
material misstatement
 Control risk: the risk that a
material misstatement will not
be prevented by related internal
controls
 Detection risk: the risk that
material misstatements will not
be detected
Assurance Report
 A written report containing a conclusion that
conveys the assurance obtained about the
subject matter information
Non-Assurance Engagements
These are engagements not covered by the Philippine
Framework on Assurance Engagements
 Agreed-upon Procedures Services
o The party engaging the professional
accountant (the intended user)
determines the procedures to be
performed and the professional
accountant provides a report of factual
findings as a result of undertaking those
procedures
o Not an assurance engagement but may
be
 Compilation of financial or other information
o PSRS 4410 (formerly PSA 930)
o For the CPA to use accounting expertise,
not auditing expertise, to collect, classify,
and summarize financial information
 Tax Services
o CPAs prepare corporate and individual
tax returns for both audit and non-audit
clients.
o Primary types:
 Tax compliance—includes the
preparation of tax returns for
individuals, corporations, estates
and trusts, and others
 Tax planning—determines the
tax consequences of planned or
potential transactions and
suggests the desirable course of
action to minimize the tax
liability while achieving the
client’s objectives
 Management Consulting/Advisory Services
o Professional services that employ the
practitioner in a consulting engagement
 Accounting and Data Processing or Information
Technology System Services
o Accountants being outsourced by small
clients with limited accounting staff
So as not to confuse users, a report that is not an
assurance report avoids, for example:
 Implying compliance with this Framework, PSAs,
PSREs, or PSAEs
 Inappropriately using the words assurance, audit,
or review
 Including a statement that could reasonably be
mistaken for a conclusion designed to enhance
the degree of confidence of intended users
about the outcome of the evaluation or
measurement of a subject matter against criteria
Having accepted an assurance engagement, a
practitioner may not change such engagement to a non-
assurance engagement, or from a reasonable assurance
engagement to a limited assurance engagement without
reasonable justification.
Expectation gap—a gap that exists between what
auditors attempt to do in an audit and the user’s
expectations of the audit.
 Chapter 3: Overview of Auditing

Philosophy of an Audit

 Businesses, institutions, and individuals must

maintain records of their financial condition and
progress.
 Records are necessary to (EDMS):
o evaluate and guide business operations
(IM)
o determine financial status (IM, GA, C&I)
o meet legal requirements (GA)
o serve as a basis for credit (C&I)
 Creditors and investors (present and
prospective)
o Study the FS for credit extension and
investment purposes
 Government agencies
o Study the GS to help them carry out the
duties imposed upon them by law
 Internal management
o Study the FS for planning, directing, and
controlling business operations
RELIABLE AND CREDIBLE INFORMATION
AUDITING
Auditing is a systematic process by which a
competent, independent person objectively obtains
and evaluates evidence regarding assertions about
economic actions and events to ascertain the degree
of correspondence between those assertions and
established criteria and communicating the results to
interested users.
SCOA-DECI (by the American Accounting Association
Systematic process
Competent, independent person
Objectively obtains and evaluates evidence
Assertions about economic actions and events
—
Degree of correspondence
Established criteria
Communicating the results
Interested users

 Systematic process
o A structured, logical, and organized
 Audit examination—the process employed to
series of steps and procedures
establish the reliability or unreliability of the
o Consists of a series of sequential steps
financial statements and supporting records
o Include information testing system and
 Auditing of financial records has become an
testing of transactions and balances
important factor in the dissemination of financial
 Competent, independent person
information and the services of the independent
o The auditor must be qualified…to know
certified public accountant are considered
how and what evidence to accumulate
indispensable (absolute necessary).
o Proper conclusion
 Auditing is a form of attestation.
o Independent metal attitude
 Attestation
o Impartial and objective thinking.
o GENERAL SENSE: an expert’s
 Objectively obtains and evaluates evidence
communication about the reliability of
o Means examining the bases for the
someone else’s assertion.
assertions (representations)
o NARROWER SENSE: a written
o Judiciously evaluating the results
communication that expresses a
without bias or prejudice
conclusion about the reliability of about
 Assertions about economic actions and events
the reliability of a written assertion that
is the responsibility of another party.
 o These are the representations made by
the individual or entity under audit
o They comprise the subject matter of
auditing
o Assertions—information contained in
the financial statements, internal
operating reports, and tax returns.
o Assertions are the representations of
management as to the fairness of the
financial statements
 Degree of correspondence
o The closeness with which the assertions
can be identified with established
criteria
o May be quantitative (ex. amount of
shortage) or qualitative (ex. measure of
the fairness of the FS)
 Established criteria
o The standards against which the
assertions or representations are judged
o Criteria—specific rules prescribed by a
legislative body, budgets, and other
measures of performance set by
management, or financial reporting
standards by the FRSC (Financial
Reporting Standards Council)
 Communicating the results
o Attestation
o Audit report—the final stage in the audit
process wherein the findings are
communicated to the users
o By attesting to the degree of
correspondence, the investigator
enhances or weakens the credibility of
the claims
o Communication of findings is achieved
through a written report
 Interested users
o Individuals who use or rely on the
auditor’s findings
o Ex. stockholders, management, creditors,
government agencies, the public
 IFAC Education Committee defines auditing as:
A structured process that:
(a) Involves the application of analytical skills,
professional judgment, and professional
skepticism;
(b) Is usually performed by a team of professionals,
directed with managerial skills;
(c) Uses appropriate forms of technology and
adheres to a methodology;
(d) Complies with all relevant technical standards
such as International Standards on Auditing
(ISAs), International Standards on Quality Control
(ISQCs), IFRS, International Public Sector
Accounting Standards (IPSAS), and any applicable
international, national, or local equivalents as
appropriate; and
(e) Complies with required standards or professional
ethics.
Objective of Auditing (PSA 120, Framework of Philippine
Standards on Auditing)
 To enable the auditor to express an opinion
whether the FS are prepared in accordance to
standards
 “present fairly, in all material respects”
Why Independent Auditing is necessary  Information
Risk
(The increased likelihood that unreliable information will
be provided to decision makers)
Factors that contribute to information risk:
a. Remoteness of information users from
information providers
b. Potential bias and motives of information
provider
c. Voluminous data
d. Complex exchange transactions
How information risk may be reduced:
1. Allow users to verify information
2. User shares information risk with management
3. Have the financial statements audited
 Revised Code of Ethics for Professional Accountants in the
Due diligence audit is an investigation or audit of a Philippines—promulgated by the BOA and approved by
potential investment or purchased company before the PRC that should be followed by an auditor.
entering the agreement of buying company.
Ethical Principles
 Ethical principles of an auditor
General Types of Audit o Independence
A. Independent Financial Statements Audit o Integrity
B. Internal Audit o Objectivity
C. Government Audit o Professional competence and due care
D. Special Audits: Other Audits or Limited o Confidentiality
Assurance Engagements o Professional behavior
o Technical standards
Independent Financial Statements Audit  Audits should be conducted in accordance with
Nature the PSA
 To determine if such statements have been  Audits should be planned and performed with
prepared in conformity with financial reporting an attitude of professional skepticism
practices that are appropriate for the auditee. Reasonable Assurance
 “attest function”  Assurance that the FS taken as a whole are free
Overall Objectives (PSA 200) from material misstatement
 To assure that the FS are free from material  Reasonable assurance—a concept relating to the
misstatement, fraud, and error accumulation of the audit evidence necessary for
 To report on the financial statements or give the auditor to conclude that there are no
opinion material misstatements in the financial
Scope—the audit procedures necessary to achieve the statements taken as a whole
audit’s objectives Responsibility for the financial Statement
 The auditor will conduct a critical and systematic  Auditor: responsible for forming and expressing
examination of the statements and of the related an opinion
documents, records, procedures, and control.  Management: responsible for preparing and
Overview of an Independent Financial Audit Engagement presenting the financial statements
1. Pre-engagement Activities Requirements for an Effective Financial Statements Audit
2. Planning Activities (Relevant qualities an auditor must possess to complete
3. Internal Control Risk Assessment Activities an audit within the framework)
4. Account Balance Audit Activities 1. The auditor must have a thorough
5. Reporting Activities understanding of the entity being audited and
the industry of which it is a part.
General Principles of an Audit 2. A comprehensive knowledge of the Financial
1. Ethical Requirements Reporting Standards in order to audit effectively.
2. Reasonable Assurance 3. A solid grasp of the concepts of internal control
3. Responsibility for the Financial Statement and competence.
4. Requirements for an Effective Financial 4. Be knowledgeable in the area of evidence
Statements Audit gathering and evaluation.

Ethical Requirements
Internal Audit
Nature
  An independent, objective assurance and
consulting activity designed to add value and
improve an organization’s operations
 Helps an organization accomplish its objectives
Objective and Scope
 To assist all members of management in the
effective discharge of their responsibilities by
furnishing them with analyses, appraisals,
recommendations, and pertinent comments
concerning the activities reviewed
Responsibility and Authority
 To inform and advise management in
consistence with the Code of Ethics of the
Internal Auditors
 To coordinate activities with others
Independence
 Independence is essential to the effectiveness of
internal auditing.
 Obtained primarily through organizational status
and objectivity
 Organizational status of the IA function and the
support accorded to it by management are
major determinants of its range and value
 Objectivity is essential to audit function
Internal Approach and Techniques (Types)
 Operational audit
o Efficiency and effectiveness
o Future-oriented, independent, and
systematic evaluation performed by the
internal auditor for management of the
operational activities
o For the purpose of improving
organizational profitability and
increasing the attainment of the other
organizational objectives
 Management audit
o Future-oriented, independent, and
systematic evaluation of the activities of
all levels of management
o For the purpose of improving
organizational profitability and
increasing the attainment of the other
organizational objectives
 Financial audit
o Historically-oriented, independent
evaluation
o Performed for the purpose of ensuring
the fairness, accuracy, and reliability of
financial data
Government Audit
Nature
 Involves the determination of whether
government funds are being handled properly
and in compliance with existing laws and
whether the programs are being conducted
efficiently and economically
Scope
 Financial and Compliance Audit
o Determines whether financial operations
are properly conducted, financial reports
are presented fairly, and entity has
complied with laws and regulations.
 Economy and Efficiency Audit
o Determines whether the entity is
managing and utilizing its resources
economically and efficiently
 Program Results
o Determines if the desired results and
benefits and objectives are achieved and
met, and whether the agency has
considered alternatives to minimize
costs
Three Main Divisions of State Audit (from the Primer on
Government Accounting and Auditing in the Philippines
issued by the PICPA Committee on GAAS in 1984)
1. Compliance audit—laws and regulation
2. Financial audit—reliability of recorded financial
data
3. Performance Audit—fin and operational
performance
a. Management Audit (Economy and
Efficiency Audit)—appraisal of
management performance; least cost
POV; cost-benefit analysis
b. Program Results Audit (Effectiveness
Audit)—evaluation of program results
Comprehensive audit
 Consists of a proper balance among compliance,
financial, and performance audits
Commission on Audit
 The highest and final authority in state auditing
 Created under Sec. 1, Art XII-D of the Philippine
Constitution
 Highest audit office of the RP
Special Audits: Other Audits or
Limited Assurance Engagements
Nature
 Other type of audit services that fall within
auditing standards but are not audits of
historical financial statements in accordance with
PFRS
 Established by PSAs 800, 805, 810
Include:
(a) Audits of FS prepared on another
comprehensive basis of accounting
(b) Audits of specified elements, accounts, or items
in a financial statement
(c) Audits of information accompanying the basic
financial statements (PSA 720)
(d) Compliance with contractual agreements
(e) Summarized financial statements
Types of Auditors
 Public Accounting Firms
o The primary responsibility is the
performance of audits of the published
historical FS of all publicly traded
companies
o Can perform operational auditing and
compliance auditing as part of
management consultancy services
 Internal Auditors
o Can be hired CPA firms or employees of
individual companies
o Concerned with all kinds of financial and
other data generated for both internal
and external users
o Also engaged in…
 Operational auditing—resource
utilization
 Management or performance
auditing and routine compliance
auditing—the effectiveness of
attaining entity objectives
o Line functions—an internal auditor must
be independent of line functions
 Government Auditors
o Ex. COA, BIR
o COA Auditors—Compliance
 Determines whether gov’t
agencies present FS fairly in
accordance with standards,
conduct programs with
economy and efficiency, and
whether desired results are
achieved.
o BIR Examiners—Compliance
 Determines whether the
taxpayers have complied with
the tax laws
o Regulatory Auditors
 SEC, BSP, Cooperative
Commission, Office of Insurance
Commission, other government
agency examiners
Accounting versus Auditing
Accounting
 The process of recording, classifying, and
summarizing economic events in a logical
manner for the purpose of providing financial
information for decision making
Auditing
 Concerned with the determination of whether
the recorded accounting information for the
entity properly reflects the economic events that
occurred during the accounting period.
Both record transactions and prepare financial
statements as linked by financial reporting standards
(FRS).
 Chapter 4: Regulation of the Practice of Public
Accountancy
Article I
 The PRC through BOA and Courts of Justice are
responsible for the public regulation of the
public accounting practice.
 Objective of public regulation: protect the
investing public from fraud, gross negligence,
and failure to comply with the laws and
regulations.
 Penalties for noncompliance of an auditor:
o Payment of damages to those claiming
injury
o Public censure (reprimand
o Injunction
o Suspension or prohibition from practice
before the SEC
o Temporary or permanent loss of license
to practice
 Philippine Accountancy Act of 2004—the
program for regulation of the accounting
profession, as implemented by the BOA
The Philippine Accountancy Act of 2004 (R.A. No. 9298)
 Repealing for the purpose Presidential Decree
No. 692 (Revised Accountancy Law)
Summary of Articles
 Article 1—Title, Declaration of Policy, Objective
and Scope of Practice
 Article 2—Professional Regulatory Board of
Accountancy
 Article 3—Examination, Registration, and
Licensure
 Article 4—Practice of Accountancy
 Article 5—Penal and Final Provisions
Objectives of the Act
 Standardization and regulation of accounting
education
 Examination for registration of CPAs
 Supervision, control, and regulation of the
practice of accountancy in the Philippines
Scope of Practice
 Practice of public accountancy
 Practice in commerce and industry
 Practice in education/academe
 Practice in the government
Article II
Composition of PRBOA
 Chairman
 6 members
 Appointed vice-chairman shall have a term of
one year
 Chairman and members hold office for a 3-year
term
 No person who has served two successive terms
shall be eligible for reappointment until a one
year lapse
Qualifications of members of the board
(a) Natural-born citizen and a resident of the Phil.
(b) Must be a duly-registered CPA with at least 10-
year work experience in any scope of practice
(c) Must be of good moral character and must not
have been convicted of crimes involving moral
turpitude
(d) Must not have any pecuniary interest in any
institution conferring an academic degree
necessary for admission to the practice of
accountancy or where review classes in
preparation for the licensure examination are
being offered or conducted, nor shall he/she be
a member of the faculty or administration
thereof at the time of his/her appointment to
the Board
Powers and Functions of the Board
(a) Prescribe and adopt the rules and regulations
necessary for carrying out the provisions of this
Act
(b) Supervise the registration, licensure, and practice
of accountancy
(c) Administer oaths
(d) Issue, suspend, revoke, or reinstate the certificate
of registration
(e) Adopt an official seal of the board
(f) Prescribe and/or adopt a Code of ethics
(g) Monitor the conditions affecting the practice of
accountancy
(h) Conduct an oversight into the quality of audits
of financial statements
(i) To investigate violations of this act and
promulgate the rules and regulations hereunder
(j) Motu proprio, make such investigations as it
deems necessary to determine whether there is
 violation of any provisions of this law, any (b) Of good moral character
accounting or auditing standard or rules (c) A holder of the degree of Bachelor of Science in
(k) Issue a cease and desist order to any person, Accountancy conferred by a school, college,
association, partnership, or corporation academy, or institute duly recognized by CHED
(l) Punish for contempt of the board and by gov’t
(m) Prepare, adopt, issue, or amend the syllabi of the (d) Has not been convicted of any criminal offense
subjects for examinations in consultation with involving moral turpitude
the academe, determine and prepare questions, Scope of examination
and correct and release results Old New
(n) Ensure that all higher educational instruction Prac-Acc 1 FAR
and offering of accountancy comply with Prac-Acc 2 AFAR
policies, standards, and requirements prescribed MAS MAS
AudTheo Tax
by authorities
AudProb Auditing
(o) Exercise such other powers as may be provided BL and Tax RFBT
by law as well as those which may be implied TOA
from the express powers granted to the board To be qualified as having passed the CPALE:
The commission:  General average of 75%
 Shall administratively supervise the BOA  No grades lower than 65% in any given subject
 Shall take custody of all records of the board
including applications for examination and Any candidate who fails in two complete CPALEs shall be
administrative and other investigative cases disqualified from taking another set examinations unless
conducted by the board he/she enrolled in and completed at least 24 units in
 Shall designate the secretary of the board subject given in the licensure exam.
 Shall provide secretariat and other support
services to implement the provisions of this act The certificate of registration shall bear the signature of:
 The PRC chairman
 The BOA chairman and members
Ground for suspension or removal of members of the  Seal of PRC
board:  Seal of BOA
The president of the Phil, upon the recommendation of
PRC and after giving the concerned member to defend A professional identification card (PIC) bears:
himself, may suspend or remove any member on the  Registration number
following grounds:  Date of issuance
(a) Neglect of duty or incompetence  Expiry date
(b) Violation or tolerance of any violation of this Act Documents signed by a CPA in connection with the
(c) Final judgment of crimes including moral practice of profession shall indicate:
turpitude  Cert registration number and its date of issuance
(d) Manipulation or rigging of the CPA exam results  Duration of validity
The board shall submit an annual report to the President  Professional tax receipt (PTR) number
at the close of each calendar year.
Article IV
Article III  CPAs wanting to practice public accountancy
 All applicants for registration for the practice of must have 3 meaningful years of experience in
accountancy shall be required to undergo a any areas of public practice including taxation
licensure examination to be given by the board  No corporations
Qualifications of applicants for examinations Working papers under the ownership of the CPA:
(a) A Filipino citizen  All working papers
  Schedules and memoranda made by the CPA  General appropriations act shall specify the
and his staff funding of this act
 Papers prepared and submitted by the client
 DOES NOT INCLUDE reports submitted by a CPA
to a client
Membership in an accredited (integrated) organization
(PICPA) shall not be a bar to membership in any other
associate of CPAs

CPAs, firms, and partnerships engaged in the practice of

public accountancy shall register with the commission
and the board, such that registration to be renewed
every three years.

Seal
 All CPA should obtain a seal of a design
prescribed by the board bearing:
o The registrant’s name
o The registration number and title
Coverage of temporary/special permits
(a) A foreign CPA called for consultation provided
that his/her practice shall be limited only for the
particular work he/she is being engaged for and
that there is no Filipino CPA qualified for such
consultation or specific purposes
(b) A foreign CPA engaged as professor, lecturer, or
critic in fields essential to accountancy education
(c) A foreign CPA who is an internationally
recognized expert

Article V
 Any violations of this act will be fined by not less
than 50T or imprisonment for a period not
exceeding 2yrs
 This act shall be effective 15 days after
publication in the Official Gazette.
 Within 90 days after effectivity of this act, rules
and regulations shall be adopted and
promulgated to carry out the provisions of this
act
 The Secretary of Justice or his duly designated
representative shall act as legal adviser to the
commission and the board
 The board shall assist the commission in filing
the appropriate charges through the concerned
persecution office in accordance with law and
rules of court
Chapter 6: Organization of CPA Firms The organization structure of not allowing CPA firms by
corporation is influenced by the following factors:
 Public accounting firms are usually organized as (1) The need to be independent from clients—to
sole proprietorships or partnerships avoid biased conclusions
 Whatever the legal form, the hierarchy in the (2) The need of a structure to encourage
public accounting firm usually includes partners, competence—to conduct audits efficiently and
managers or supervisors, in-charge auditors effectively
(sometimes called senior and staff auditors) (3) The increased risk of litigation

Advantages Disadvantages Competence is encouraged by having a large number of

Sole Proprietorship Sole Proprietorship professionals with related interests associated in one
 Practitioner is his  Assumes all the firm.
own boss and is risks and
dependent responsibilities
Public accounting firm organization (DRAW HERE):
 No regular office  Income may not
hours be regular and
 Earn more than a should be
salaried supplemented
employee from other
 Attain self- sources
fulfillment from  Must rely on own
success of judgment
practice
Partnership Partnership
 Greater stability  Personal
and continuity differences
 Responsibility, between partners
risks, and cost of may arise
practice can be  One partner may
shared feel that the
 Opportunity for other partner is
specialization is not contributing
increased enough to the
 Can handle larger welfare of the
engagements firm
more efficiently
and adequately
 Can combine
talent, resources,
time, and
experience

 A corporation is not allowed to engage in the

practice of public accounting in the Philippines
and therefore the SEC shall not register any
corporation organized for the practice of public
accountancy
 “professional corporations”—professional
practice of corporations that is allowed in the US
and other parts of the world
 Usually in a CPA firm, there are fewer partners
than managers and senior accountants, and
fewer senior accountants than staff
 Assistants of staffs spend 2 or 3 years in each
classification before achieving partner status
 Audit Partner
Concerned about the
overall quality of each audit
Signs the audit report and
accepting ultimate
responsibility for each audit
Maintaining client
relationships
Planning audits
Evaluating audit findings
Resolving technical matters
SPECIFIC DUTIES
1. To plan and review all
phases of an audit
engagement
2. To sign the audit
report
3. To approve the firm’s
billing to the client
4. To obtain/establish
contracts with clients
5. To determine office
operating policies
Audit
Manager/Supervisor
Administers important
aspects of audit
engagements
Scheduling the audit work
to be done with client
personnel
Assigning work to audit
staff, supervising staff, and
reviewing staff work
Responsible for controlling
staff time and overseeing
billing and collections
Keeps the audit partner
apprised of significant
developments during the
audit
1. To act as a liaison
officer between
partners and other
members of the staff
2. To discuss with the
client problems that
may arise in the course
of the audit
3. To exercise direct
supervision on seniors
in charge of specific
audit engagements
4. To review working
papers and drafts of
audit report
5. To discuss reports and
results of audit with
clients
6. To take direct charge
of training programs
In-Charge (Senior) Staff Auditor
Auditor
Work under the direction of Perform various audit
audit managers and assist procedures
them in administering the
audit Gather audit evidence to
use as a basis for the audit
Generally participate in reports
audit planning
Perform procedures that
Provide direct supervision relate to a variety of aspects
to staff auditor of a client’s activities
Review work performed by (e.g. testing payroll,
staff auditors inventory, accounts
payable)
Summarize audit findings
for the audit partner to Test internal control
review procedures over cash
payments and test cash
balances
1. To prepare the audit 1. To prepare schedules
program to review by and reports on
the partner, principal, findings
or supervisor 2. To work on tax returns
2. To assign particular 3. To check the accuracy
phases of the audit of footings and
work to staff and to extensions on books of
exercise direct accounts and other
supervision records
3. To perform certain 4. To check the postings
audit procedures of entries from the
requiring skill and journals to the ledger
experience: 5. To examine vouches
a. Review of articles of supporting minor
incorporation, by disbursements
laws, and other 6. Generally, to serve as
nonfinancial an assistant
records
b. Verification of
assets and liabilities
 and the basis of
valuation
c. Comparison of the
current and
preceding period's
oper. results
d. Examination of
adequacy of
allowances for depr,
bad debts,
provision for
income taxes, etc.
4. To take up with the
client or with the
partner or principal
problems or questions
that arise in the course
of the audit
5. To assemble the
working papers in an
audit, and prepare a
draft of the report and
financial statements
for review and
approval by the
partner of supervisor

Chapter 7: System of Quality Control for Public Definitions (keywords)

Accountancy Firms
Quality control for firms that perform audits and review
of financial statements, and other assurance and related
services engagements (Philippine Standard on Quality
Control 1)
Applicable to:
 Audits
 Reviews
 Other assurance services
Objective of PSQC
The objective of the firm is to establish and maintain a
system of quality control to provide it with reasonable
assurance that:
(a) The firm and its personnel comply with
professional standards and regulatory and legal
requirements; and
(b) Reports issued by the firm or engagement
partners are appropriate in the circumstances
(a) Date of report—to date the report
(b) Engagement documentation—the record of
work, results, conclusions “working papers”
“workpapers”
(c) Engagement partner—responsible for the
engagement and its performance
(d) Engagement quality control review—objective
evaluation, on or before date of report, is for
audits of FS of listed entities and other
engagements determined by the firm necessary
to be reviewed
(e) Engagement quality control reviewer—partner,
other person in the firm, suitably qualified
external person, etc., with sufficient appropriate
experience to objectively evaluate the significant
judgments made
(f) Engagement team—all partners and staff
performing the engagement, and any individuals
engaged by the firm. Excludes external experts
(g) Firm—a sole practitioner, partnership, or other
entity of professional accountants
 (h) Inspection—in relation to completed
engagements, designed to provide evidence of
compliance by engagement teams w/ the firm’s
QC policies and procedures
(i) Listed entity—whose shares, stock, or debt are
quoted or listed on a recognized stock exchange
(j) Monitoring—ongoing consideration and
evaluation of the firm’s system of QC, periodic
inspection
(k) Network firm—a firm or entity belonging to a
network
(l) Network—a larger structure aimed at
corporation and aimed at profit or cost-sharing
(m) Partner—with authority to bind the firm
(n) Personnel—partners and staff
(o) Professional standards—AASC engagement
standards, relevant ethical requirements, and
more
(p) Reasonable assurance—high, but not absolute
level of assurance
(q) Relevant ethical requirements—ethical
requirements to which the engagement team
and EQCR are subject
(r) Staff—professionals and experts other than
partners
(s) Suitably qualified external person—an individual
outside the firm w/ competence and capabilities
to act as an engagement partner
Requirement (highlights only)
 The firm shall comply with each requirement
unless the requirement is not relevant in the
circumstances
 Requirements are designed to enable the firm to
achieve the objectives of the PSQC
Elements of a system of quality control (LRAHEM)
 Leadership responsibilities for quality within the
firm
 Relevant ethical requirements
 Acceptance and continuance of client
relationships and specific engagements
 Human resources
 Engagement performance
 Monitoring
The firm shall document its policies and
procedures and communicate them to
the firm’s personnel
Leadership responsibilities for quality within the firm
 Policies and procedures designed to promote
internal culture recognizing that quality is
essential in performing engagements
 To assume ultimate responsibility for the firm’s
system of quality
o CEO (or equivalent)
o Firm’s managing board of partners, ir
appropriate (or equivalent)
 Any person/persons assigned operational
responsibility for the firm’s SQC by the CEO of
MBOP has sufficient and appropriate experience
and ability and necessary authority to assume
such responsibility
 Quality-oriented internal culture for clear,
consistent and frequent actions and messages
from all levels of management
 To:
o Perform work that complies with PSRLR
o Issue reports appropriate in the
circumstances
 Reward high quality work
 Training seminars, meetings, formal or informal
dialogue, mission statements, newsletters,
briefing memoranda, etc
 Particular importance: for the firm’s leadership to
recognize that the firm’s business strategy is
subject to the overriding requirement for the
firm to achieve quality in all engagements that
the firm performs.
 Promoting such an internal culture includes:
o Establishment of policies and
procedures addressing performance
evaluation, compensation, and
promotion (incentive systems)
o Assignment of mgmt. responsibilities so
that commercial considerations do not
override the quality of work performed
o Provision of sufficient resources for the
devt, docu, and support of its QCPP
 Requirements for persons responsible for SQPP
o Sufficient and appropriate experience
o Ability
 Relevant Ethical Requirements
 Policies and procedures designed to provide it
with reasonable assurance that the firm and its
personnel comply with relevant ethical
requirements
Independence
 Policies and procedures designed to provide it
with reasonable assurance that the firm, its
personnel, and others subject to independence
requirements maintain independence where
required by relevant ethical requirements. Such
PP shall enable the firm to:
o Communicate its independence
requirements to personnel and those
subject to them
o Identify and evaluate circumstances and
relationships that create threats to
independence and to take appropriate
action to eliminate those threats by
applying safeguards, or withdrawal
where permitted
 Requirements of such policies and procedures
o Engagement partners should provide
the firm with relevant info about client
engagements
o Personnel to promptly notify the firm of
circumstances and relationships that
create a threat so that actions can be
taken
o Accumulation and communication of
relevant info to appropriate personnel
so that:
 Can determine whether they
satisfy independence
requirements
 Can maintain and update its
records relating to
independence
 Can take appropriate actions
regarding threats to
independence that are not at an
acceptable level
 Policies and procedures designed to provide it
with reasonable assurance that it is notified of
breaches of independence requirements, and
enable it to take appropriate actions to resolve
such situations. It shall include requirements for:
o Personnel to notify the firm of
independence breaches
o Firm to communicate identified
breaches to:
 Engagement partner
 Other relevant personnel, the
network, and those subject to
independence requirements
o Prompt communication to the firm by
the engagement partner and the above
individuals to the actions taken to
resolve the matter
 At least annually, the firm shall obtain written
confirmation of compliance with its policies and
procedures in independence from all firm
personnel required to be independent by
relevant ethical requirements
 Policies and procedures:
o Setting out criteria for determining the
need for safeguards to reduce familiarity
threat to an acceptable level when using
the same senior personnel on an
assurance engagement over a long
period of time
o Requiring, for audits of FS of listed
entities, the rotation of the ff. after a
specified period in compliance with REE
 Engagement partner
 Individuals responsible for EQCR
 Others subject to rotation
requirements
Compliance with REE
 Fundamental principles of professional ethics
(IOPCP)
o Integrity
o Objectivity
o Professional competence and due care
o Confidentiality
o Professional behavior
 Part B of Phil. Code of Ethics
o Provides how the conceptual framework
is to be applied in specific situations
o Provides examples of safeguards to
address threats to compliance with
fundamental principles
  Fundamental principles are reinforced by:
o Leadership of the firm
o Education and training
o Monitoring
o A process for dealing with non-
compliance
Firm, network, and network firm
 Firm
o A sole practitioner or partnership of
professional accountants
o An entity that controls such parties
through ownership, management, or
other means
o An entity controlled by such parties
through ownership, management, or
other means
Written confirmation
 Written confirmation may be in paper or
electronic form. By obtaining confirmation and
taking appropriate action on non-compliance,
the firm demonstrates importance to
independence
Familiarity threat
 The threat that may be created by using the
same senior personnel on an assurance
engagement over a long period of time
 Appropriate criteria to address familiarity threat
o Nature of engagement and the extent to
which it involves a matter of public
interest
o The length of service of the senior
personnel on the engagement
Rotating the senior personnel or
requiring an EQCR are examples of
safeguards
 PEC recognizes that the familiarity threat is
particularly relevant in the context of financial
statement audits of listed entities. And so,
rotation of the key audit partner after a pre-
defined period
Considerations specific to public sector audit
organizations
 Statutory measures may provide safeguards for
the independence of public sector auditors.
However, threats may still exist regardless of the
measures designed to protect it.
 Listed entities are not common in the public
sector. However there may be other public
sector entities that are significant due to size,
complexity, or public interest aspects
 In the public sector, legislation may establish the
appointments and terms of office of the auditor
with engagement partner responsibility. This
may override rules of rotation but rotation is still
considered important and is promoted
Acceptance and Continuance of Client Relationships
and Specific Engagements
 Policies and procedures for the acceptance and
continuance of client relationships and specific
engagements, designed to provide the firm with
reasonable assurance that it will only undertake
or continue relationships and engagements
where the firm:
o Is competent to perform the
engagement and has the capabilities,
including time and resources to do so
o Can comply with relevant ethical
requirements
o Has considered the integrity of the client
and does not have information that
would lead it to conclude that the client
lacks integrity
 Such policies and procedures shall require
o The firm to obtain such considered
necessary information before accepting
an engagement with a new client, when
deciding whether to continue existing an
engagement, and when considering
acceptance of a new engagement with
an existing client
o The firm to determine whether it is
appropriate to accept the engagement if
a potential conflict of interest is
identified
 o The firm to document how the issues
were resolved if there were issues that
have been identified and the
engagement or relationship is accepted
or continued
 The firm shall establish policies and procedures
on continuing an engagement and the client
relationship, addressing the circumstances where
the firm obtains information that would have
caused it to decline the engagement had that
information been made available earlier. Such PP
shall include the consideration of:
o The professional and legal
responsibilities that apply to the
circumstances including whether there is
a requirement for the firm to report to
the person or persons who made the
appointment or in some cases to
regulatory authorities
o The possibility of withdrawing from the
engagement or from both the
engagement and the relationship
Competence, capabilities, and resources
 Include whether:
o Firm personnel have knowledge of
relevant industries or subject matters
o Firm personnel have experience with
relevant regulatory or reporting
requirements, of the ability to gain the
necessary skills and knowledge
effectively
o Firm has sufficient personnel with the
necessary competence and capabilities
o Expert are available if needed
o Individuals meeting the criteria and
eligibility requirements to perform
engagement quality control review are
available
o The firm is able to complete the
engagement within the reporting
deadline
Integrity of Client
 Matters to consider regarding integrity of client
o Identity and business reputation of
client’s owners, key management, and
those charged with governance
o Nature of client operations and business
practices
o Information concerning attitude of ditto
towards such matters as aggressive
interpretation of accounting standards
and the internal control environment
o Whether the client is aggressively
concerned with maintaining the firm’s
fees as low as possible
o Indications of an inappropriate limitation
in the scope of work
o Indications that the client might be
involved in money laundering or other
criminal activities
o Reasons for the proposed appointment
of the firm and non-reappointment of
the previous firm
o The identity and business reputation of
related parties
The extent of knowledge a firm will have
regarding the integrity of a client will
generally grow within the context of an
ongoing relationship with that client
 Sources of information on such matters obtained
may include the following:
o Communications with existing or
previous providers of professional
accountancy services to the client in
accordance with relevant ethical
requirements
o Inquiry of other firm personnel or third
parties such as bankers, legal counsel,
and industry peers
o Background searches of relevant
databases
Continuance of client relationships
 Deciding whether to continue a client
relationship includes consideration of significant
matters that have arisen during the previous or
current engagements, and their implications for
continuing the relationship (e.g. a client may
have started to expand its business operations
into an area where the firm does not possess the
necessary expertise)
Withdrawal
 W/drawal from engagement or both address
issues that include the following:
 o Discussing with the appropriate level of
client’s management and those charged
with governance the appropriate action
that the firm might take
o Discussing with the appropriate level of
client’s management and those charged
with governance w/drawal from the
engagement or from both, and the
reasons of such
o Considering whether there is a PSRLR for
the firm to remain in place or for the
firm to report the withdrawal from
engagement or both, including reasons
for such withdrawal, to authorities
o Documenting significant matters,
consultations, conclusions, and the basis
for the conclusions
Considerations specific to public sector audit
organizations
 In the public sector, auditors may be appointed
in accordance with statutory procedures.
Accordingly, certain of the requirements and
considerations regarding the acceptance and
continuance of client relationships and specific
engagements may not be relevant. Nonetheless,
establishing policies and procedures as
described may provide valuable information to
public sector auditors in performing risk
assessments and in carrying out reporting
responsibilities
Human Resources
 Policies and procedures designed to provide it
with reasonable assurance that it has sufficient
personnel with the competence, capabilities, and
commitment to ethical principles necessary to:
o Perform engagements in accordance
with PSRLR; and
o Enable the firm or engagement partners
to issue reports that are appropriate in
the circumstances
Assignment of engagement teams
 The firm shall assign responsibility for each
engagement to an engagement partner and
shall establish policies and procedures requiring
that:
o The identity and role of the partner are
communicated to key members of client
management and those CWG
o The partner has appropriate
competence, capabilities, and authority
to perform the role
o The responsibilities of the engagement
partner are clearly defined and
communicated to that partner
 The firm shall also establish policies and
procedures to assign appropriate personnel with
the necessary competence and capabilities to
o Perform engagements in accordance
with PSRLR; and
o Enable the firm or engagement partners
to issue reports that are appropriate in
the circumstances
 Personnel issues relevant to the firm’s PP related
to HR include:
o Recruitment
o Performance evaluation
o Capabilities, including time to perform
assignments
o Competence
o Career development
o Promotion
o Compensation
o Estimation of personnel needs
Effective recruitment processes and
procedures help the firm select individuals of
integrity with the capacity to develop
competence and capabilities necessary to
perform the firm’s work and possess the
appropriate characteristics to enable them to
perform competently
 Competence can be developed through a variety
of methods, including the following:
o Professional education
o CPD
o Work experience
o Coaching by more experienced staff
o Independence education for personnel
required to be independent
 The continuing competence of the firm’s
personnel depends to a significant extent on an
appropriate level of CPD so that personnel
maintain their knowledge and capabilities.
 Effective PP emphasize the need for continuing
training for all levels of firm personnel, and
provide the necessary training resources and
assistance to enable personnel to develop and
maintain the required competence and
capabilities
 The firm may use a SQEP when internal technical
and training resources are unavailable
 Performance evaluation, compensation, and
promotion procedures give due recognition and
reward to the development and maintenance of
competence and commitment to ethical
principles. Steps a firm may take in developing
and maintaining competence and commitment
to ethical principles include:
o Making personnel aware of firm
expectations regarding performance and
ethical principles
o Providing personnel with evaluation of
and counseling on performance,
progress, and career development
o Helping personnel understand
advancement to positions of greater
responsibility depends upon
performance quality and adherence to
ethical principles and that failure to
comply with the firm’s policies and
procedures may result in disciplinary
action
Considerations specific to smaller firms
 The size and circumstances of the firm will
influence the structure of firm’s performance
evaluation process. Smaller firms may employ
less formal methods of evaluation of personnel
Assignment of engagement partners
 Policies and procedures may include systems to
monitor the workload and availability of
engagement partners to enable these individuals
to have sufficient time to adequately discharge
their activities
Assignment of engagement teams
 The firm’s assignment of engagement teams and
the determination of the level of supervision
required includes consideration of the
engagement team’s
o Understanding and practical experience
with engagements of similar nature and
complexity through appropriate training
and participation
o Understanding of PSRLR
o Technical knowledge and expertise
including knowledge of relevant IT
o Knowledge of relevant industries in
which the clients operate
o Ability to apply professional judgment
o Understanding of the firm’s QCPP
Engagement Performance
 Policies and procedures designed to provide it
(the firm) with reasonable assurance that
engagements are performed in accordance with
PSRLR and that the firm or the engagement
partner issues reports that are appropriate in the
circumstances. Such policies and procedures
shall include:
o Matters relevant to promoting
consistency in the quality of
engagement performance
o Supervision responsibilities
o Review responsibilities
 The firm’s review responsibility policies and
procedures shall be determined on the basis that
work of less experienced team members is
reviewed by more experienced engagement
team members
Consultation
 The firm shall establish policies and procedures
designed to provide it with reasonable assurance
that:
o Appropriate consultation takes place on
difficult contentious matters
o Sufficient resources are available to
enable appropriate consultation to take
place
o The nature and scope of, and
conclusions resulting form, such
consultations are documented and are
agreed by both the individual seeking
consultation and the individual
consulted
o Conclusions resulting from consultations
are implemented
Engagement quality control review
 The firm shall establish policies and procedures
requiring, for appropriate engagements, an
EQCR that provides an objective evaluation of
the significant judgements made by the
engagement team and the conclusions reached
in formulating the report. Policies and
procedures shall:
o Require an engagement quality control
review for all audits of FS of listed
entities
o Set out criteria against which audits,
reviews, and other assurances shall be
evaluated to determine whether EQCR
should be done
o Require an EQCR for all engagements
meeting the criteria established in
previous item
 The firm shall establish policies and procedures
setting out the nature, timing, and extent of an
EQCR. The engagement report should not be
dated until the completion of the engagement
quality control review
 EQCR must include: (significant matters, FS/SM,
engagement documentation, evaluation of
conclusions)
o Discussion of significant matters with
the engagement partner
o Review of the FS or other subject matter
information and the proposed report
o Review of selected engagement
documentation relating to significant
judgments the engagement team made
and the conclusions it reached
o Evaluation of the conclusions reached in
formulating the report and
consideration of whether the proposed
report is appropriate
 EQCR of audits of financial statements of listed
entities must also include:
o Engagement team’s evaluation of the
firm’s independence in relation to the
specific engagement
o Whether appropriate consultation has
taken place on matters involving
differences of opinion or other difficult
or contentious matters and the
conclusions arising from those
consultations
o Whether documentation selected for
review reflects the work performed in
relation to the significant judgments
made and supports the conclusions
reached
Criteria for the eligibility of EQC reviewers
 The firm shall establish PP to address the
appointment of EQC reviewers and establish
their eligibility through:
o The technical qualifications required to
perform the role (necessary experience
and authority)
o The degree to which an EQC reviewer
can be consulted on the engagement
without compromising the reviewer’s
objectivity
 The firm shall establish PP designed to maintain
the objectivity of the EQC reviewer
 EQC reviewer must be replaced when the
reviewer’s ability to perform an objective review
may be impaired
Documentation of the EQCR
 PP on documentation of the EQCR which require
documentation that:
o The procedures required by the firm’s
policies on EQCR have been performed
o The EQCR has been completed on or
before the date of report; and
o The reviewer is unaware of unresolved
matters that would cause him to believe
that the significant judgments the
engagement team made and the
conclusions it reached were not
appropriate
Differences of opinion
 The firm shall establish PP for dealing with and
resolving differences of opinion within the
engagement team, with those consulted, and
where applicable, between the engagement
partner and the EQCreviewer.
 PP require that:
o Conclusions reached be documented
and implemented
o Report not be dated until the matter is
resolved
Engagement documentation
 Completion of the assembly of final engagement
files
o The firm shall establish PP for
engagement teams to complete the
assembly of final engagement files on a
timely basis after the engagement
reports have been finalized
 Confidentiality, safe custody, integrity,
accessibility, and retrievability of engagement
documentation
 Retention of engagement documentation
o The firm shall establish PP for the
retention of engagement
documentation for a period sufficient to
meet the needs of the firm or as
required by law or regulation
Consistence in the quality of engagement performance
 The firm promotes consistency in the quality of
engagement performance through its policies
and procedures—often accomplished through
written or electronic manuals, software tools, or
other forms of standardized documentation, and
industry or subject matter-specific guidance
materials. Matters addressed may include:
o How engagement teams are briefed on
the engagement
o Processes for complying with applicable
engagement standards
o Processes of engagement supervision,
staff training, and coaching
o Methods of reviewing the work
performed, the significant judgments
made and the form of report being
issued
o Appropriate documentation of the work
performed and of the timing and extent
of the review
o Processes to keep all policies and
procedures current
 Appropriate teamwork and training assist less
experienced members of the engagement team
to clearly understand the objectives of the
assigned work
Supervision
 Tracking the progress of the engagement
 Considering the competence and capabilities of
individual members of the engagement team,
whether they have sufficient time to carry out
their work, understand the instruction, or if work
is being carried out in accordance with the
planned approach to the engagement
 Addressing significant matters arising during the
engagement, considering their significance and
modifying the planned approach appropriately
 Identifying matters for consultation or
consideration by more experienced engagement
team members during the engagement
Review (consists of whether)
 Work has been performed in accordance with
PSRLR
 Significant matters have been raised for
consideration
 Appropriate consultations have taken place and
the resulting conclusions have been
documented and implemented
 There is need to revise the nature, timing, and
extent of work performed
 The work performed supports the conclusions
reached and is appropriately documented
 The evidence obtained is sufficient and
appropriate to support the report
 The objectives of the engagement procedures
have been achieved
Consultation
 Includes discussion at the appropriate
professional level, with individuals within or
outside the firm who have specialized expertise
 Uses appropriate research resources as well as
the collective experience and technical expertise
of the firm. It helps promote quality and
improves the application of professional
judgment. Appropriate recognition of
consultation in the firm’s policies and
procedures help promote a culture in which
consultation is recognized as a strength and
encourages personnel to consult on difficult or
contentious matters
 Effective consultation on technical, ethical, and
other matters within or outside the firm, if
applicable can be achieved when those
consulted:
 o Are given all relevant facts that will
enable them to provide informed advice
o Have appropriate knowledge, seniority,
and experience
And when conclusions resulting from
consultations are appropriately documented
and implemented
 Documentation of consultations with other
professionals that involve difficult or contentious
matters that is sufficiently complete and detailed
contributes to an understanding of
o The issue on which consultation was
sought
o The results of the consultation, including
any decisions taken, the basis for those
decisions and how they were
implemented
Considerations specific to smaller firms
 A firm without appropriate internal resources
needing to consult externally may take
advantage of advisory services provided by
o Other firms
o Professional and regulatory bodies
o Or commercial organizations that
provide relevant QC services
Before contracting such services,
consideration of the competence and
capabilities of the external provider helps
the firm to determine whether the external
provider is suitably qualified for that
purpose
Engagement quality control reviewer
 Criteria for an engagement quality control
review (criteria for determining which
engagements other than audits of FS of listed
entities are to be subject to an EQCR may
include:)
o Nature of the engagement and extent to
which it involves a matter of public
interest
o Identification of unusual circumstances
or risks in an engagement or class of
engagements
o Whether laws or regulations require an
EQCR
Nature, timing, and extent of the EQCR
 The engagement report is not dated until the
completion of the EQCR. However,
documentation of EQCR may be dated after such
date
 Conducting the EQCR in a timely manner at
appropriate stages during the engagement
allows significant matters to be promptly
resolved to the EQCR’s satisfaction on or before
the date of the report
 The extent of the EQCR may depend on the
complexity of the engagement, whether the
entity is a listed entity, and the risk that the
report might not be appropriate in the
circumstances. The performance of EQCR does
not reduce the responsibilities of the
engagement partner
EQCR of a listed entity
 Other matters relevant to evaluating the
significant judgments made by the engagement
team that may be considered in an EQCR of an
audit of financial statements of listed entity
include:
o Significant risks identified during
engagement and the responses to those
risks
o Judgments made, particularly with
respect to materiality and significant
risks
o The significance and disposition of
corrected and incorrect misstatements
identified during the engagement
o Matters to be communicated to
management and those charged with
governance and, where applicable, other
parties such as regulatory bodies
These other matters may also be applicable
for EQCR of audits of FS of other entities,
reviews, and other assurance services
Considerations specific to public sector audit
organizations
 Certain public sector entities may be of sufficient
significance to warrant performance of an EQCR
Criteria for the eligibility of EQCR
  Sufficient and appropriate technical expertise,
experience, and authority
o What constitutes SATEEA depends on
the circumstances of the engagement
Consultation with an EQC reviewer
 The engagement partner may consult the
engagement quality control reviewer during the
engagement, for example, to establish that a
judgment made by the engagement partner will
be acceptable to the engagement quality control
reviewer. Such consultation avoids identification
of differences of opinion at a late stage of the
engagement and need not compromise the
engagement quality control reviewer’s eligibility
to perform the role. Where the nature and extent
of the consultations become significant the
reviewer’s objectivity may be compromised
unless care is taken by both the engagement
team and the reviewer to maintain the reviewer’s
objectivity. Where this is not possible, another
individual within the firm or a suitably qualified
external person may be appointed to take on the
role of either the engagement quality control
reviewer or the person to be consulted on the
engagement.
Objectivity of the EQC reviewer
 The firm is required to establish PP designed to
maintain objectivity of the EQC reviewer and
such PP must provide that the EQC reviewer:
o Must not be selected by the
engagement partner, where practicable
o Does not participate in the engagement
during the period of review
o Does not make decisions for the
engagement team
o Is not subject to other considerations
that would threaten the reviewer’s
objectivity
Considerations specific to smaller firms
 It may not be practicable, in the case of firms
with few partners, for the engagement partner
not to be involved in selecting the engagement
quality control reviewer. Suitably qualified
external persons may be contracted where sole
practitioners or small firms identify engagements
requiring engagement quality control reviews.
Alternatively, some sole practitioners or small
firms may wish to use other firms to facilitate
engagement quality control reviews. Where the
firm contracts SQEP
Considerations specific to public sector audit
organizations
 In the public sector, a statutorily appointed
auditor (for example, an Auditor General, or
other suitably qualified person appointed on
behalf of the Auditor General) may act in a role
equivalent to that of engagement partner with
overall responsibility for public sector audits. In
such circumstances, where applicable, the
selection of the engagement quality control
reviewer includes consideration of the need for
independence from the audited entity and the
ability of the engagement quality control
reviewer to provide an objective evaluation.
Differences of opinion
 Effective procedures encourage identification of
differences of opinion at an early stage, provide
cear guidelines as to the successive steps to be
taken thereafter, and require documentation
regarding the resolution of the differences and
the implementation of the conclusions reached
 Procedures to resolve such differences may
include consulting with another practitioner or
firm, or a professional or regulatory body
Engagement documentation
 Law or regulation may prescribe the time limits
by which the assembly of final engagement files
for specific types of engagement is to be
completed. If no time limits are prescribed by
law, the firm must establish time limits that
reflect the need to complete the assembly of
final engagement files on a timely basis. If audit,
the time limit would ordinarily not be more than
60 days after report
 Where two or more different reports are issued
in respect of the same subject matter
information of an entity, the firm’s policies and
procedures relating to time limits for the
assembly of final engagement files address each
report as if it were for a separate engagement.
This may, for example, be the case when the firm
issues an auditor’s report on a component’s
financial information for group consolidation
purposes and, at a subsequent date, an auditor’s
 report on the same financial information for
statutory purposes.
Confidentiality, safe custody, integrity, accessibility, and
retrievability of engagement documentation
 Relevant ethical requirements establish an
obligation for the firm’s personnel to observe at
all times the confidentiality of information
contained in engagement documentation, unless
specific client authority has been given to
disclose information, or there is a legal or
professional duty to do so. Specific laws or
regulations may impose additional obligations
on the firm’s personnel to maintain client
confidentiality, particularly where data of a
personal nature are concerned.
 Whether engagement documentation is in
paper, electronic or other media, the integrity,
accessibility or retrievability of the underlying
data may be compromised if the documentation
could be altered, added to or deleted without
the firm’s knowledge, or if it could be
permanently lost or damaged. Accordingly,
controls that the firm designs and implements to
avoid unauthorized alteration or loss of
engagement documentation may include those
that:
o Enable the determination of when and
by whom engagement documentation
was created, changed or reviewed;
o Protect the integrity of the information
at all stages of the engagement,
especially when the information is
shared within the engagement team or
transmitted to other parties via the
Internet;
o Prevent unauthorized changes to the
engagement documentation; and
o Allow access to the engagement
documentation by the engagement
team and other authorized parties as
necessary to properly discharge their
responsibilities.
 Controls to maintain CSCIAR of engagement
documentation
o Password among team members
o Appropriate backup routines for
electronic documentation at stages
o Procedures for proper distribution
o Procedures for access restriction
 Procedures designed to maintain IAR of scanned
documentation
o Generate scanned copies that reflect
entire content
o Integrate scanned copies into
engagement files
o Enable scanned copies to be retrieved
and printed
Retention of engagement documentation
 The needs of the firm for retention of
engagement documentation, and the period of
such retention, will vary with the nature of the
engagement and the firm’s circumstances, for
example, whether the engagement
documentation is needed to provide a record of
matters of continuing significance to future
engagements. The retention period may also
depend on other factors, such as whether local
law or regulation prescribes specific retention
periods for certain types of engagements, or
whether there are generally accepted retention
periods in the jurisdiction in the absence of
specific legal or regulatory requirements.
 In the specific case of audit engagements,
retention period would ordinarily be more than
7 years from report date
Ownership of engagement documentation
 Engagement documentation is the property of
the firm unless otherwise specified by law or
regulation. The firm may, at its discretion, make
portions of, or extracts from, engagement
documentation available to clients, provided
such disclosure does not undermine the validity
of the work performed, or, in the case of
assurance engagements, the independence of
the firm or its personnel.
Monitoring
 The firm shall establish a monitoring process
designed to provide it with reasonable assurance
that the policies and procedures relating to the
system of quality control are relevant, adequate,
and operating effectively. This process shall:
 o Include an ongoing consideration and
evaluation of the firm’s system of QC
including, on a cyclical basis, inspection
of at least one completed engagement
for each engagement partner
o Require responsibility for the monitoring
process to be assigned to a partner,
partners, or other persons with sufficient
and appropriate experience and
authority
o Require that those performing the
engagement or the EQCR are not
involved in inspecting the engagements
Evaluating, communicating, and remedying identified
deficiency
 Deficiencies should be evaluated whether they
are either
o Instances that do not necessarily
indicate that the firm’s system of QC is
insufficient
o Systemic, repetitive, or other significant
deficiencies that require prompt
corrective action
The firm shall communicate to relevant engagement
partners and other appropriate personnel deficiencies
noted as a result of the monitoring process and
recommendations for appropriate remedial action.
 Recommendations for appropriate remedial
actions for deficiencies include the following:
o Taking action in relation to an individual
engagement or member of personnel
o Communication of findings to those
responsible for training and prof devt
o Changes to QCPP
o Disciplinary action against those who fail
to comply with PP especially those who
do so repeatedly
 The firm shall establish policies and procedures
to address cases where the results of the
monitoring procedures indicate that a report
may be inappropriate or that procedures were
omitted during the performance of the
engagement. Such policies and procedures shall
require the firm to determine what further action
is appropriate to comply with relevant
professional standards and regulatory and legal
requirements and to consider whether to obtain
legal advice.
 The firm shall communicate at least annually the
results of the monitoring. Information
communicated shall include the following:
o Description of the monitoring
procedures performed
o Conclusions drawn from the procedures
o Where relevant, a description of
systemic, repetitive, or other significant
deficiencies and of the actions taken to
resolve or amend those deficiencies
 The firm’s PP in network monitoring procedures
shall require:
o The network communicate the overall
scope, extent, and results of the
monitoring process to appropriate
individuals at least annually
o The network communicate promptly
deficiencies in the system of QC
Complaints and allegations
 The firm shall establish PP designed to provide it
with reasonable assurance that it deals
appropriately with
o Complaints and allegations that work
performed fails compliance with PSRLR
o Allegations of noncompliance with QC
 Firm shall take appropriate actions when
complaints, allegations, and deficiencies are
identified
Monitoring the firm’s QCPP
 The purpose of monitoring compliance is to
provide an evaluation of:
o Adherence to PSRLS
o Whether the system of QC has been
appropriately designed and effectively
implemented
o Whether the firm’s QCPP have been
appropriately applied
 Ongoing consideration and evaluation of system
of QC include matters such as the following
o Analysis of:
 New developments in PSRLR
and how they are reflected in PP
  Written confirmation of
compliance with PP on
independence
 CPD, including training
 Decisions related to acceptance
and continuance of client
relationships and specific
engagements
o Determination of corrective actions and
improvements to be taken including
provision of feedback into the firm’s PP
regarding education and training
o Communication to appropriate firm
personnel of weaknesses identified in
the system, in the level of understanding
of the system, or compliance with it
o Follow-up by appropriate firm personnel
so that necessary modifications are
promptly made to the QCPP
 Inspection cycle policies may (for example)
specify a cycle that spans three years. The
manner in which the inspection cycle is
organized depends on many factors such as
o Size of the firm
o Number and geographical location of
offices
o Results of previous monitoring
procedures
o Degree of authority both personnel and
offices have
o Nature and complexity of the firm’s
practice and organization
o Risks associated with the firm’s clients
and specific engagements
 The inspection process includes the selection of
individual engagements, some of which may be
selected without prior notification to the
engagement team. In determining the scope of
inspections, the firm may take into account the
scope or conclusions of an independent external
inspection program. However, an IEIP does not
act as a substitute for the firm’s own internal
monitoring program.
Considerations specific to smaller firms
 In the case of small firms, monitoring procedures
may need to be performed by individuals
responsible for design and implementation of
the firm’s quality control policies and procedures
or who may be involved in performing the EQCR.
A firm with a limited number of persons may
choose to use a SQEP or another firm to carry
out engagement inspections and other
monitoring procedures. Alternatively, the firm
may establish arrangements to share resources
with other appropriate organizations to facilitate
monitoring activities.
Communicating deficiencies
 The reporting of identified deficiencies to
individuals other than relevant engagement
partners need not include an identification of the
specific engagements concerned, although there
may be cases where such identification may be
necessary for the proper discharge of the
responsibilities of the individuals other than the
engagement partners.
Complaints and allegations
 Complaints and allegations may originate from
within or outside the firm. They may be made by
firm personnel, clients, or other third parties.
They may be received by engagement team
members or other firm personnel.
Investigation policies and procedures
 PP established for the investigation of
complaints and allegations may include that the
partner supervising the investigation
o Has sufficient and appropriate
experience
o Has authority within the firm
o Is otherwise not involved in the
engagement
The partner supervising the investigation
may involve legal counsel as necessary
Considerations specific to smaller firms
 It may not be practicable, in the case of firms
with few partners, for the partner supervising the
investigation not to be involved in the
engagement. These small firms and sole
practitioners may use the services of a suitably
qualified external person or another firm to carry
out the investigation into complaints and
allegations.
Documentation of the System of Quality Control
 The firm shall establish PP requiring appropriate
documentation to provide evidence of the
operation of each element of its system of QC
 The firm shall establish PP that require retention
of documentation for a period of time sufficient
to permit those performing monitoring
procedures to evaluate the firm‘s compliance
with its system of QC, or for a longer period if
required by law or regulation
 The firm shall establish PP requiring
documentation of complaints and allegations
and the responses to them
 The form and content of documentation is a
matter of judgment and depends on a number
of factors including the following:
o Size of the firm and the number of
offices
o Nature and complexity of the firm’s
practice and organization
 Appropriate documentation relating to
monitoring includes
o Monitoring procedures including the
procedure for selecting completed
engagements to be inspected
o A record of evaluation of
 Adherence to PSLRS
 Whether SQC is appropriately
designed and effectively
implemented
 Whether the firm’s QCPP have
been appropriately applied
o Identification of the deficiencies noted,
an evaluation of their effect, and the
basis for determining what further
action is necessary
Consideration specific to smaller firms
 Smaller firms may use more informal methods in
the documentation of their system QC such as
manual notes, checklists, forms
Chapter 8: Philippine Standards on Auditing
PSA 120 (Framework of Philippine Standards on
Auditing)
Introduction
 The Auditing Standards and Practices Council
(ASPC)—authorized to issue PSAs
 “Auditor”—describes both auditing and related
services which may be performed. Does not
imply that a person performing related services
need be the auditor of FS
Financial Reporting Framework
 Financial statements need to be prepared in
accordance with one or a combination of:
o Accounting standards generally
accepted in the Philippines
o International accounting standards
o Another authoritative and
comprehensive FR framework designed
for use in FR and is identified in the FS
Framework for Auditing and Related Services
 Audits are distinguished from related services
 Audit—high level of assurance
 Related services:
o Review—moderate level of assurance
o Agreed-upon procedures—no assurance
o Compilation—no assurance
 The framework does not apply to other services
provided by audits such taxation, consultancy,
and financial and accounting advise
Level of assurance
 Assurance—the auditor’s satisfaction as to the
reliability of an assertion being made by one
party for use by another party
 Audit engagement—high but not absolute level
of assurance that the info subject to audit is free
of material misstatement; expressed positively in
the audit report as reasonable assurance
 Review engagement—moderate level of
assurance that the info subject to review is free
of material misstatement
 Agreed-upon procedures—the auditor simply
provides a report of the factual findings, no
assurance is expressed. It is the user himself
assessing the procedures and findings reported
by the auditor and draw their own conclusions
 Compilation engagement—users of compiled
information derive benefit from the accountant,
no assurance is expressed
 To distinguish compilation engagements from
audits and other related services, the term
“accountant” rather than “auditor” has been
used to refer to a professional accountant in
public practice
Audit
 Objective of audit of FS—to enable auditor to
express opinion; “present fairly, in all material
respects’
 In forming audit opinion, auditor obtains
sufficient appropriate audit evidence to draw
conclusions
 Auditor’s opinion enhances credibility of FS by
providing a high, but not absolute, level of
assurance
 Absolute assurance is not attainable for the ff.
reasons:
o Use of testing
o Inherent limitations of accounting and
internal control
o Most evidence available to auditor is
persuasive rather than conclusive in
nature
Related Services
Reviews
 The objective of a review of financial statements
is to enable an auditor to state whether, on the
basis of procedures which do not provide all the
evidence that would be required in an audit,
anything has come to the auditor's attention
that causes the auditor to believe that the
financial statements are not prepared, in all
 material respects, in accordance with an to that information or consents to the use of the
identified financial reporting framework auditor’s name in a professional connection
 Review—comprised of inquiry and analytical  If the auditor is not associated in this manner,
procedures designed to review the reliability of third parties can assume no responsibility of the
an assertion that is the responsibility of one auditor
party for use of intended users  If the auditor learns that his name is
 Difference from audit, a review does not inappropriately being used, the auditor should
ordinarily involve: require management to cease doing so and
o an assessment of accounting and consider what further steps to take such as:
internal control system o Informing third party
o tests of records o Seeking legal advice
o responses to inquiries by obtaining
evidence through inspection,
observation, confirmation, and
computation
 The procedures of a review make the
achievement of its objective less likely than in an
audit engagement
 The level of assurance provided in a review
report is less than in an audit report

Agreed-upon procedures
 Carry out procedures of an audit nature to which
the auditor and the entity and any appropriate
third parties have agreed and to report on
factual findings.
 Recipients of the report must form their own
conclusions from the auditor’s report
 Report is restricted to the parties in agreement
and awareness of the procedures to be
performed
Compilations PSA 220 (Quality Control for an Audit of Financial
 Where an accountant is engaged to use Statements)
accounting expertise as opposed to auditing
expertise to collect, classify, and summarize Scope
financial information  This PSA deals with the specific responsibilities
 Entails reducing detailed data to a manageable of the auditor regarding quality control
and understandable form without requirement procedures for an audit of financial statements
to test the assertions  This also addresses the responsibilities of the
 Procedures employed are not designed and do engagement quality control reviewer
not enable the accountant to express any System of quality control and role of engagement teams
assurance on financial information  PSQC 1 requires a system of QCPP to establish
 Service is performed with professional due care and maintain a system of quality control to
Auditor Association with Financial Information provide reasonable assurance that:
 An auditor is associated with financial o The firm and its personnel comply with
information when the auditor attaches a report PSRLR
 o Reports issued by the firm or
engagement partners are appropriate in
the circumstances
 This PSA is premised on the basis that the firm is
subject to PSQC
 Within the system of QC, engagements teams
have a responsibility to implement quality
control
Objective
 “The objective of the auditor is to implement QC
procedures at the engagement level that provide
the auditor with reasonable assurance that”:
o The audit complies with PSRLR
o Auditor’s report issued is appropriate in
the circumstances
Definitions (keywords only)
 Engagement partner—responsible for the audit
engagement and its performance; has
appropriate authority
 EQCR—objective evaluation; only for audits of FS
of listed entities and those other audit
engagements that require it
 EQC reviewer—not part of the team, with
sufficient appropriate experience and authority
to objectively evaluate the significant judgments
 Engagement team—all partners and staff
performing the engagement and those engaged
to perform audit; excludes external expert
 Firm—sole prac, partnership, entity of
professional accountants
 Inspection—for completed engagements,
designed to provide evidence of compliance by
engagement
 Listed entity—entity whose shares are listed on a
recognized stock exchange
 Monitoring—ongoing consideration of the firm’s
system of QC, periodic inspection of a selection
of completed engagements
 Network firm—belongs to a network
 Network—a larger stricter
o Aimed at cooperation
o Aimed at profit or cost sharing
 Partner—any individual with authority to bind
the firm
 Personnel—partners and staff
 Professional standards—PSA and relevant ethical
requirements
 Relevant ethical requirements—ethical
requirements subjecting engagement teams and
EQC reviewers; comprised of Parts A and B of the
Code of Ethics for professional accountants in
the Philippines (Philippines Ethics Code together
with national requirements that are more
restrictive
 Staff—professionals other than partners
including experts that the firm employs
 SQEP—individual outside the firm; with
competence and capabilities to act as an
engagement partner
Requirements
1. Leadership responsibilities for quality on audits
2. Relevant ethical requirements
3. Acceptance and continuance of client
relationships and audit engagements
4. Assignment of engagements
5. Engagement performance
6. Monitoring
7. Documentation
Application
System of quality control and role of engagement teams
 Unless otherwise suggested, the engagement
team may rely on the firm’s system of QC in
relation to
o Competence of personnel—through
recruitment and formal training
o Independence—through the
accumulation and communication of
relevant independence information
o Maintenance of client relationship—
acceptance and continuance systems
o Adherence to RLR—through the
monitoring process
Leadership Responsibilities for Quality on Audits
 The engagement partner shall take responsibility
for the overall quality on each audit engagement
to which that partner is assigned
Application
 The actions of the engagement partner and
appropriate messages to other members of the
team in taking responsibility for the overall
quality on each audit engagement emphasize:
o The importance to audit quality of:
  Performing work that complies
with PSRLR
 Compliance to QCPP
 Issuing audit reports
appropriate in the circumstances
 The team’s ability to raise
concerns without fear of reprisal
o The fact that quality is essential in
performing audit engagements
Relevant Ethical Requirements
 Engagement partner shall remain alert (through
observation and inquiry) for evidence of
noncompliance with REE by team members
 Engagement partner, in consultation with others
in firm, shall determine appropriate action if
team members have not complied with REE
Independence
 Engagement partner shall form a conclusion on
compliance with independence requirements
that apply to the audit engagement and shall
o Obtain relevant information from the
firm to identify and evaluate
circumstances and relationships that
create threats to independence
o Evaluate information on identified
breaches and determine whether they
create a threat to independence of the
audit engagement
o Take appropriate action to eliminate
such threats or reduce them to an
acceptable level by applying safeguards
or withdrawal if appropriate and
permitted by law
Application
Compliance with relevant ethical requirements
 Philippines Ethics Code establishes the
fundamental principles of professional ethics
o Integrity
o Objectivity
o Professional competence due care
o Confidentiality
o Professional behavior
Definition of firm, network, and network firm
 The definitions of firm, network, or network firm
in relevant ethical requirements may differ from
those set out in this PSA.
 PEC defines the firm as
o Sole practitioner or partnership of
professional accountants
o Entity that controls parties
o Entity controlled by parties
Threats to independence
 The engagement partner may identify a threat to
independence regarding the audit that
safeguards may not eliminate or reduce to
acceptable level.
 In such case, the engagement partner reports to
the relevant persons within the firm to
determine appropriate actions
Considerations specific to public sector entities
 Statutory measures may provide safeguards for
the independence of public sector auditors.
Public sector auditors auditing for statutory
auditors may need to adopt their approach in
order to promote compliance
 Where the public sector auditor’s mandate does
not permit withdrawal from engagement,
auditor shall disclose through a public report the
circumstances that have arisen that will case a
private sector auditor to withdraw.
Acceptance and continuance of client relationship
and audit engagements
 Engagement partner shall be satisfied that
appropriate procedures of acceptance and
continuance systems have been followed and
shall determine that conclusions reached in this
regard are appropriate
 If the engagement partner obtains info that
would have cause the firm to decline the
engagement, the engagement partner shall
communicate that information promptly to the
firm so that the firm and the engagement
partner can take the necessary action
Application
 The ff. information assists the engagement
partner in determining whether the conclusions
reached regarding the acceptance and
continuance of client relationships and audit
engagements are appropriate:
o Integrity of owners, key management
and those charged with governance
 o Whether engagement team is
competent to perform the audit
engagement and has the necessary
capabilities, time, and resources
o Whether the firm and the engagement
team can comply with relevant ethical
requirements
o Significant matters that have arisen
during the current or previous audit
engagement
Considerations specific to public sector entities
 In the public sector, auditors may be appointed
in accordance with statutory procedures
 Certain of the requirements and considerations
regarding acceptance and continuance in this
PSA may be irrelevant
 Nonetheless, info gathered as a result of the
process described may be valuable to public
sector for risk assessments and carrying out
reporting responsibilities
Assignment of Engagement Teams
 The engagement partner shall be satisfied that
the engagement team and any auditor’s experts
not part of the team collectively have the
appropriate competence and capabilities to:
o Perform the audit engagement in
accordance with PSRLR
o Enable an auditor’s report that is
appropriate in the circumstances to be
issued
Application
 A team also includes a member using expertise
in a specialized area of accounting or auditing
whether engaged by the firm, who performs
audit procedures on the engagement
 When considering the appropriate competence
and capabilities of the engagement team as a
whole, the ff. should be considered by the
engagement partner:
o The team’s understanding of, and
practical experience with audit
engagements of a similar nature and
complexity through appropriate training
and participation
o The team’s understanding of PSRLR
o The team’s technical expertise, including
expertise with relevant information
technology and specialized areas in
accounting and auditing
o Knowledge of relevant industries in
which the client operates
o Ability to apply professional judgment
o Understanding of the firm’s QCPP
Considerations specific to public sector entities
 Additional appropriate competence may include
skills that are necessary to discharge the terms
of the audit mandate in a particular jurisdiction
 Such competence may include an understanding
of the applicable reporting arrangements,
including reporting to the legislature or other
governing body or in the public interest
 The wider scope of a public sector audit may
include:
o some aspects of performance auditing
o comprehensive assessment of
compliance with legislative authorities
o preventing and detecting fraud and
corruption
Engagement Performance
Direction, supervision, and performance
 The engagement partner shall take responsibility
for:
o The direction, supervision, and
performance of the audit engagement in
compliance with PSRLR
o The auditor’s report being appropriate in
the circumstances
Reviews
 The engagement partner shall take responsibility
for reviews being performed in accordance with
the firm’s review policies and procedures
 On or before the date of the auditor’s report, the
engagement partner shall be satisfied that
sufficient appropriate audit evidence has been
obtained to support the conclusions reached
and for the auditor’s report to be issued. All
done through a review of the audit
 documentation and discussion with the
engagement team
Consultation
 The engagement partner shall
o Take responsibility for the engagement
team undertaking consultation
o Be satisfied that members of the
engagement team have undertaken
appropriate consultation during the
course of the engagement, both within
the engagement team and also between
engagement team and others at the
appropriate level within or outside the
firm
o Be satisfied that the nature, scope, and
conclusions or and from such
consultations agree with the party
consulted
o Determine that conclusions resulting
from such consultations have been
implemented
Engagement quality control review
 For audits of FS of listed entities and those
requiring review, the engagement partner shall
o Determine than an EQC reviewer has
been appointed
o Discuss significant matters arising during
the audit engagement and those
identified during the EQCR
o Not date the auditor’s report until EQCR
is completed
 The EQC reviewer shall perform an objective
evaluation of the significant judgments made by
the engagement team and the conclusions
reached in formulating the auditor’s report. Such
evaluation shall involve:
o Discussion of significant matters
o Review of the FS and proposed auditor
report
o Review of selected audit documentation
o Evaluation of the conclusions reached in
formulating the report and
consideration of whether it is
appropriate
 For audits of FS of listed entities, the EQCR shall
also consider
o Engagement team’s evaluation of the
firm’s independence
o Whether appropriate consultation has
taken place on matters involving
differences of opinion
o Whether audit documentation selected
for review reflects the work performed
Differences of opinion
 If differences of opinion arise within the
engagement team, with those consulted, or
between partner and EQC reviewer, the
engagement team shall follow the firm’s policies
and procedures for dealing with and resolving
differences of opinion.
Application
Direction, supervision, and performance
 Direction of the engagement team involves
informing the team members of the ff. matters:
o Their responsibilities
o Responsibilities of respective partners
o Objectives to be performed
o Nature of the entity’s business
o Risk-related issues
o Problems that may arise
o Detailed approach to the performance
of the engagement
 Discussion among members of the engagement
team allows less experienced team members to
raise questions with more experienced team
members so that appropriate communication
can occur within the engagement team
 Appropriate teamwork and training assist less
experienced members of the engagement team
to clearly understand the objectives of the
assigned work
 Supervision includes matters such as
o Tracking the progress of the audit
engagement
o Considering the competence and
capabilities of each member
o Addressing significant matters
o Identifying matters for consultation
Reviews
Review responsibilities
 Under PSQC 1, the firm’s review responsibility
policies and procedures are determined on the
basis that work of less experienced team
 members is reviewed by more experienced team
members
 A review consists of consideration whether
o Work has been performed in accordance
with PSRLR
o Significant matters have been raised
o Appropriate consultations have taken
place, documented, and implemented
o There is a need to revise the nature,
tiing, and extend of work performed
o The work performed supports the
conclusions reached and is appropriately
documented
o Evidence obtained is sufficient and
appropriate to support auditor report
o Objectives have been achieved
The engagement partner’s review of work performed
 Timely reviews of the following by the
engagement partner at appropriate stages
o Critical areas of judgment
o Significant risks
o Other areas
 The engagement partner need not review all
audit documentation but may do so
 An engagement partner taking over an audit
during the engagement may apply the review
procedures to review the work performed to the
date of a change in order to assume the
responsibilities of an engagement partner
Considerations relevant where a member of the
engagement team with expertise in a specialized area of
accounting or auditing is used
 Where ditto, direction, supervision and review of
the team member’s work may include matters
such as
o Agreeing with the member the nature,
scope, and objectives of that member’s
work: and the respective roles of, and
the NTE of communication between that
member and other members of the
engagement team
o Evaluating the adequacy of that
member’s work, including the relevance
and reasonableness of that member’s
findings
Consultation
 Effective consultation can be achieved when
those consulted:
o Are given all the relevant facts
o Have appropriate knowledge, seniority
and experience
 It may be appropriate for the engagement team
to consult outside the firm if there is lack of
appropriate internal resources
Engagement quality control review
Completion of the EQCR before dating the auditor report
 Auditor’s report should be dated no earlier than
the date on which there is already sufficient
appropriate evidence on which to base the
auditor’s opinion on the FS.
 Conducting review at appropriate stages allows
significant matters to be promptly resolved to
the satisfaction of the EQCR
 Documentation of the EQCR may be completed
after the date of the auditor’s report
Nature, timing, and extent of EQCR
 Remaining alert for changes in circumstances
allows the engagement partner to identify
situations in which an EQCR control is necessary
 The extent of the EQCR may depend on the
complexity of the audit engagement, whether
the entity is a listed company, and the risks that
the auditor’s report does not reduce the
responsibilities of the engagement partner.
EQCR of listed entities
 Matters relevant to evaluating the significant
judgments made by the engagement team that
may be considered in an EQCR may include
 Significant risks identified during the
engagement and the responses to those
including assessment and response to fraud
 Judgments made with respect to materiality and
significant risks
 Significance and disposition of corrected and
uncorrected misstatements identified during the
audit
 Matters to be communicated to management
and those charged with governance
Considerations specific to smaller entities
 In addition to the audits of financial statements
of listed entities, an engagement quality control
review is required for audit engagements that
 meet the criteria established by the firm that
subjects engagements to an engagement quality
control review. In some cases, none of the firm’s
audit engagements may meet the criteria that
would subject them to such a review.
Considerations specific to public sector entities
 A statutorily appointed auditor or other SQEP
may act in a role equivalent to that of
engagement partner with overall responsibility
for public sector audits
 In such circumstances, the selection of the EQC
reviewer includes consideration of the need for
independence from the audited entity and the
ability of the EQC reviewer to provide an
objective evaluation.
 Listed entities are not common in the public
sector. However, there may be other public
sector entities that are significant due to size,
complexity or public interest aspects, and which
consequently have a wide range of stakeholders.
 There are no fixed objective criteria on which the
determination of significances is based. Despite
that, public sector auditors evaluate which
entities may be of sufficient significance to
warrant performance of an EQCR
Monitoring
 An effective system of quality control includes a
monitoring process designed to provide the firm
with reasonable assurance that its policies and
procedures relating to the system of quality
control are relevant, adequate, and operating
effectively
 The engagement partner shall consider the
results of the firm’s monitoring process as
evidenced in the latest information circulated by
the firm
 And whether deficiencies noted in that info may
affect the audit engagement
Application
 In considering deficiencies that may affect the
audit engagement, the engagement partner may
have regard to measures the firm took to rectify
the situation that the engagement partner
considers are sufficient in the context of that
audit
 A deficiency in the firm’s system of QC does not
necessarily indicate that a particular audit
engagement was not performed in accordance
with PSRLR or that the auditor’s report was not
appropriate
Documentation
 The auditor shall document:
o Issues identified with respect to
compliance with REE and how they were
resolved
o Conclusions on compliance with
independence requirements that apply
to the audit engagement
o Conclusions reached regarding
acceptance and continuance of client
relationships and audit engagements
o Nature, scope, and conclusions from
consultations
 The EQCR shall document that
o The procedures required by the firm’s
policies on EQCR have been performed
o The EQCR has been completed on or
before date of auditor’s report
o The reviewer is not aware of unresolved
matters
Documentation of consultations
 Documentation of consultations with other
professionals that involve difficult or contentious
matters that is sufficiently complete and detailed
contributes to an understanding of
o The issue on which consultation was
sought
o The results of the consultation including
decisions taken and the basis for those
decisions and how they were
implemented
PSA 200 (Overall objectives of the independent
auditor and the conduct of an audit in accordance
with PSA)
Introduction
Scope of this PSA
  This PSA establishes the independent auditor’s  The auditor is not responsible for the detection
overall responsibilities when conducting an audit of misstatements that are not material to the
of FS in accordance with PSAs. financial statements as a whole
 It sets out the overall objectives of the
independent auditor designed to enable the
independent auditor to meet those objectives
 Explains the scope, authority, and structure of
the PSA and includes requirements establishing
the general responsibilities of the independent
auditor applicable in all audits, including the
obligation to comply with the PSAs
 The independent auditor is referred to as the
auditor hereafter
 PSAs are written in the context of an audit of FS
by an auditor. They are to be adapted as
necessary in the circumstances when applied to
audits of other historical financial info
An audit of financial statements
 Purpose—to enhance the degree of confidence
of intended users in the financial statements
 Such will be achieved by the expression of an
opinion by the auditor on whether the financial
statements are prepared, in all material respects,
in accordance with the framework (an audit
conducted in accordance with PSAs and relevant
ethical requirements)
 FS subject to audit are those of the entity,
prepared and presented by their management
with oversight from those charged with
governance
 The audit of the financial statements does not
relieve management or those charged with
governance of those responsibilities
 Auditor’s opinion—on material misstatement
whether due to error or fraud
 Reasonable assurance—high level of assurance.
Obtained by:
o Auditor obtaining sufficient appropriate
audit evidence to reduce audit risk
 Materiality—applied in audit planning and
performance and in evaluating the effect of
identified misstatements on the audit and of
uncorrected misstatements
 Misstatements, including omissions, are
considered to be material if, individually or in
aggregate, they could reasonably be expected to
influence the economic decisions of users
Chapter 9: Overview of Risk-Based Process 3. Identification for each of the key processes (as
well as sub-processes) the objectives, inputs,
Three phases of the audit process activities, outputs, systems, and transactions
1. Risk assessment (planning stage) 4. Assessment of the risks that the processes will
2. Risk response (testing stage) not meet the goals and controls related to those
3. Reporting (conclusion) risks

Four critical components of risk that are relevant to

The risk assessment and risk response phases are fluid. conducting the audit:
1. (1.0) Audit risk—give unqualified opinion on
Auditor’s standard report: materially misstated FS
We conducted our audits in accordance with PSA. 2. (2.0) Engagement risk—economic risk that a CPA
Those standards require that we comply with the firm is exposed to; reputations, default of client
ethical requirements and plan and perform the fees, financial loss, etc. controlled by careful
audit to obtain reasonable assurance (there is still client selection and retention
some risk) about whether the financial statements 3. (3.0) Financial reporting risk—risks directly
are free of material misstatements (auditor’s related to the recording of transactions and
responsibility is limited to material financial presentation of financial data
information).  Competence and integrity of
management
Materiality and risk—fundamental concepts important to  Incentive to management to misstated
planning the audit and designing the audit approach. financial statements
 Complexity of transactions
Risk-based audit approach—an audit approach that  Internal control
begins with an assessment of the types and likelihood of 4. (3.0) Business risk—risk that affect operations
misstatements in an account balance and then adjusts and potential outcomes of organizational
the amount and type of audit work, to the likelihood of activities
material misstatements occurring in account balances.  Economic climate
Activities in terms of risks  strategies and  Technological change
objectives  management’s plans and processes  Competition
 Business volatility
Account-based audit—auditors first obtain an  Geographic location
understanding of control and assess control risk for
particular types of errors and frauds in specific accounts The auditor can control audit risk in two different ways:
and cycle 1. Avoid audit risk by not accepting certain
companies as client (reduce ER to 0)
Risk—a concept used to express uncertainty about 2. Set audit risk at a level that the auditor believes
events and/or their outcomes that could have a material will mitigate the likelihood that the auditor will
effect on the organization fail to identify material misstatements

Performed by the auditor in a risk-based audit The Risk-Based Audit Process

approach (IEIA) I. Risk assessment activities (PPP)
1. Identification of the client’s strategy and the a. Performance of preliminary engagement
processes for developing that strategy activities to decide whether to accept or
2. Examination of the core business process and continue an audit engagement
resource management b. Planning the audit to develop an overall
audit strategy and audit plan
 c. Performance of risk assessment
procedures to identify or assess risk of
material misstatement through
understanding the entity
II. Risk response (DI)
a. Designing overall responses and further
audit procedures to develop appropriate
responses to the assessed risk of
material misstatement
b. Implementing responses to assessed risk
of material misstatement to reduce audit
risk to an acceptable low level
III. Reporting (EF)
a. Evaluating the audit evidence obtained
to determine what additional audit work
(if any) is required
b. Forming an opinion based on audit
findings and preparing the auditor’s
report
PHASE 1-A PERFORMANCE OF PRELIMINARY
ENGAGEMENT ACTIVITIES
At the beginning of the current audit engagement,
the auditor should perform the following activities (QC,
ER-independence, terms of engagement) QET:
1. Perform procedures required by PSA 220
(QCoaAoFS) regarding the continuance of the
client relationship and the specific audit
engagement.
2. Evaluate compliance with ethical requirements,
including independence.
3. Establish an understanding of the terms of
engagement as required by PSA 210 (Agreeing
the Terms of Audit Engagements).
Performing the preliminary engagement activities at the
beginning of the current audit engagement assists the
auditor in identifying and evaluating events or
circumstances that may adversely affect the auditor’s
ability to plan and perform the audit engagement.
Performing PEA enables the auditor to plan an audit
engagement where:
1. The auditor maintains necessary independence
and ability to perform the engagement
2. There are no issues with management integrity
that may affect auditor’s willingness to continue
3. There is no misunderstanding with the client as
to the terms of the engagement
Initial procedures on both client continuance and
evaluation of ethical requirements (including
independence) are completed prior to the performance
of other significant activities for the current audit
engagement.
For continuing audit engagements, such initial
procedures often occur shortly after (or in connection
with) the completion of the previous audit.
PURPOSE OF PERFORMING PEA: To help ensure that
the auditor has considered any events or circumstances
that may adversely affect the auditor’s ability to plan and
perform the audit engagement to reduce audit risk to an
acceptably low level. It ensures that:
 Necessary independence and ability to
perform the engagement is maintained
 No issues with management integrity
 No misunderstanding with the client
The auditor’s consideration of client continuance and
ethical requirements including independence occurs
throughout the performance of the audit engagement as
conditions and changes in circumstances occur.
Some new engagements are easily obtained through:
1. Business transactions such as acquisition of a
company by an existing client
2. (competitively) Through social contacts which
lead to a request that the CPA firm submit a
proposal for performing the company’s annual
audit
It is essential for a CPA firm to maintain its INTEGRITY,
OBJECTIVITY, and REPUTATION FOR PROVIDING HQ
SERVICES.
An important element of a public accounting firm’s
QCPP is a system for deciding whether to accept a new
client and, on a continuing basis, deciding whether to
continue providing services to existing clients.
Before accepting an engagement with a new client,
the CPA firm shall assess whether it (CRI)
1. Is competent to perform the engagement and
has the capabilities including time and resources
to do so
2. Can comply with the relevant ethical
requirements
3. Has considered the integrity of the client and
does not have information that would lead it to
conclude that the client lacks integrity
The CPA firm shall check whether the preconditions for
an audit are present such as:
1. Whether the financial reporting framework to be
applied in the financial statements are
acceptable
2. Agreement of management that it acknowledges
and understands its responsibility
a. For the preparation of financial
statements in accordance with
applicable financial reporting framework
including where relevant to their fair
presentation,
b. For such internal control as
management determines is necessary to
enable the preparation of financial
statements that are free from material
misstatement whether due to fraud or
error, and
c. To provide the auditor with
i. Access to all information
ii. Additional information
iii. Unrestricted access to persons
The engagement letter shall include: (ORRIRs)
a. Objective and scope of the audit of FS
b. Responsibilities of auditor
c. Responsibilities of management
d. Identification of applicable financial reporting
framework for the prep of FS
e. Reference to the expected form and content of
any reports to be issued by the auditor and a
statement that there may be circumstances in
which a report may differ from its expected form
and content.
Recurring Audits
 The auditor shall assess whether circumstances
require the terms of the audit engagement to be
revised and whether there is a need to remind
the entity of the existing terms of the audit
engagement
 The auditor shall not agree to the change in the
terms of the audit engagement where there is
no reasonable justification for doing so
 Auditor and management shall agree on and
record the new terms of the engagement in an
engagement letter or other suitable form of
written agreement
If the auditor is unable to agree to a change and not
permitted by management to continue the original audit
engagement, the auditor shall:
1. Withdraw from the audit engagement where
possible under applicable law or regulation
2. Determine whether there is any obligation, either
contractual or otherwise, to report the
circumstances to other parties such as those
charged with governance, owners, or regulators
PHASE 1-B PLANNING THE AUDIT TO DEVELOP
AN
OVERALL AUDIT STRATEGY AND
AUDIT PLAN
 The auditor should plan the audit so that the
engagement will be performed in an effective
manner.
 Plan of action—developed to organize, coordinate,
and schedule activities of the audit staff.
Nature and Scope of Audit Planning
 Audit planning—involves the establishment of the
overall audit strategy for the engagement and
developing an audit plan, in order to reduce audit
risk to an acceptable low level
 Involves the engagement partner and other key
members of the engagement team
Nature and extent of planning activities will vary
according to the:
 Size of the entity
 Complexity of its operations
 Auditor’s previous experience with said entity
 Changes in circumstances that occur during the
engagement
 In discussing with entity personnel matters included
in the overall audit strategy or audit plan, care is
required in order not to compromise the
effectiveness of the audit
Benefits of Audit Planning (AIEPC):
 It helps ensure that appropriate attention is
devoted to important areas of the audit
 It aids in identifying potential problems and
resolving them on a timely basis
 It helps ensure that the audit is properly
organized, managed, and performed in an
effective and efficient manner
 It assists in the proper assignment and review of
the work of the engagement team members
 It helps coordinate the work to be done by
auditors of components and other parties
involved such as expert, specialists, etc.
iii. Discussion with management regarding
the expected communication on the
status of audit work
c. Considering the important factors that will
determine the focus and direction of the
engagement team efforts
i. Determination of appropriate materiality
levels
ii. Preliminary identification of areas where
there may be higher risks of MM
iii. Preliminary identification of material
components and account balances
iv. Evaluation of whether the auditor may
plan to obtain evidence regarding the
effectiveness of internal control, and
v. Identification of recent significant entity-
specific, industry, financial reporting or
other relevant developments
d. Considering the results of preliminary
engagement activities and, where applicable,
whether knowledge gained on other
engagements performed by the engagement
partner for the entity is relevant; and
e. Ascertaining the nature, timing, and extent of
resources necessary to perform the engagement

The Overall Audit Strategy

 Overall audit strategy—sets the scope, timing, and
direction of the audit and guides the development of
the more detailed audit plan.

The process of establishing the audit strategy involves:

a. Identifying the characteristics of the engagement
that define its scope
i. The financial reporting framework
ii. Industry specific reporting requirements;
and
iii. The locations of the components of the
entity
b. Ascertaining the reporting objectives of the
engagement to plan the timing of the audit and
the nature of the communication required such
as
i. Deadlines for interim and final reporting
ii. Key dates
Chapter 10: Understanding the Entity and its
Environment
This chapter discusses the process of obtaining an
understanding of the entity and its environment and
assessing the risks of material misstatement in a financial
statement audit as required by PSA 315 (Identifying and
Assessing the Risks of Material Misstatements through
Understanding the Entity and Its Environment).
PSA 315 presents an overview of the requirements such
as:
1. Risk assessment procedures and sources of
information about the entity and its
environment, including its internal control
2. Understanding the entity and its environment,
including its internal control
3. Identifying and assessing of the risks of material
misstatements
4. Material weakness in internal control
5. Documentation
I. Risk assessment procedures and sources of
information about the entity and its environment,
including its internal control
 A continuous, dynamic process of gathering,
updating and analyzing information throughout
the audit
 (PSA 500) Risk assessment procedures—audit
procedures to obtain an understanding
Risk assessment procedures to provide a basis for the
identification and assessment of risks of material
misstatements:
a. Inquiries of management and others within the
entity
b. Analytical procedures
c. Observation and inspection
 For each aspect of the understanding—auditor
not required to perform all risk assessment
procedures
 In obtaining the required understanding—all risk
assessment procedures required
Inquiries
 Other audit procedure that may provide
information that may be helpful in identifying
risks of material misstatement
 E.g. entity’s external legal counsel, valuation
experts, reviewing information obtained from
external sources (e.g. analysts, banks, rating
agencies, etc.), inquiries from management and
those responsible for financial reporting
 Inquiries obtained that helps the auditor in
identifying risks of material misstatement
(inquiries towards):
i. Those charged with governance—to
understand the environment where FS
are prepared
ii. Internal audit personnel—design and
effectiveness of entity’s internal control
iii. Employees involved in initiating,
processing, or recording complex and
unusual transactions—appropriateness
of the selection and application of
certain accounting policies
iv. In-house legal counsel—matters such as
litigation, compliance with laws and
regulations, knowledge of fraud of
suspected fraud, warranties, post-sales
obligations, arrangements with business
partners, etc.
v. Marketing or sales personnel—changes
in the entity’s marketing strategies, sales
trends, or contractual arrangements with
its customers
Analytical procedures (PSA 520)
 Helpful in identifying the existence of unusual
transactions or events, and amounts, rations, and
trends that indicate matters of the FS and audit
implications
 In performing such, the auditor develops
expectations about plausible relationships that
are reasonable expected to exist
 When comparison of those expectations with
recorded amounts or ratios developed yield
unusual or unexpected relationships, then they
are considered in identifying risks of material
misstatement
Observation and Inspection
  These support inquiries of management and
others and also provide information about the
entity and its environment
 Such audit procedures include the following
i. Observation of entity activities and
operations
ii. Inspection of documents (business plans
and strategies), records, and internal
control manuals
iii. Reading reports prepared by
management (quarterly or interim
financial and management reports) and
those charged with governance (minutes
of meetings)
iv. Visit to the entity’s premises and plant
facilities
v. Tracing transactions through the
information system relevant to financial
reporting (walk-throughs)
 When the auditor intends to use interim
information about the entity and its
environment, the auditor should determine
whether changes have occurred that may affect
the relevance of such information in the current
audit
 For continuing engagements, the auditor’s
previous experience with the entity contributes
to the understanding of the entity
 However, such information may be rendered
irrelevant by changes in the entity and its
environment
 Members of the engagement team should
discuss the susceptibility of the entity’s FS to
MM
II. 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
i. Relevant industry, regulatory, and other
external factors including the applicable FR
framework
ii. The nature of the entity including
o Its operations
o Its ownership and governance structures
o The types of investments that the entity
is making and plans to make
o The way that the entity is structured and
how it is financed, to enable the auditor
to understand the classes of
transactions, account balances, and
disclosures to be expected in the
financial statements
iii. The entity’s selection and application of
accounting policies including the reasons for
changes thereto
iv. The entity’s objectives and strategies, and
those related business risks that may result in
risks of MM
v. The measurement and review of the entity’s
financial performance
The nature, timing, and extent of the risk assessment
procedures performed depend on the circumstances of
the engagement such as:
1. Size of the entity
2. Complexity of the entity
3. Auditor’s experience with the entity
A. Industry, regulatory, and other external factors,
including the applicable financial reporting
framework
 The auditor should obtain an understanding of
the abovementioned matters
 Industry factors: environment competition,
business partner relationships, and technological
developments
 Regulatory factors: applicable FR framework,
legal and political environment, and
environmental requirements affecting the
industry and entity
 Other external factors: general economic
conditions
Concerning the overall attractiveness of the industry,
they consider factors such as:
 Barriers to entry
 Strength of competitors
 Bargaining power of suppliers of raw materials
and labor
 Bargaining power of customers
Other characteristics of the client’s industry that are
considered:
  Economic conditions  An understanding of the ownership and relations
 Financial trends between owners and other people or entities is
 Governmental regulations also important in determining whether related
 Changes in technology party transactions have been identified and
 Widely used accounting methods accounted for appropriately (PSA 550 “Related
Industry conditions
Regulatory Other external Parties”)
environment factors
The market and Accounting General level of
 The auditor should obtain an understanding of
competition, principles and economic activity the entity’s selection and application of
demand, capacity, industry specific (e.g. recession,
accounting policies and consider whether they
and price practices growth)
competition are appropriate for its business and consistent
Regulatory Interest rates and with the applicable FR framework and
Cyclical or seasonal framework for a availability of
activity regulated industry financing accounting policies used in the relevant industry

Product technology Legislation and Inflation, currency

relating to the regulation that
entity’s products affect entity
operations
Energy supply and
cost Regulatory
requirements
Direct supervisory
activities
Taxation
Government policies
Monetary controls
Fiscal
Financial incentives
Environmental
requirements
B. Nature of the entity
 The nature of an entity refers to the entity’s
operations, its ownership and governance, the
types of investments that it is making and plans
to make, the way the entity is structured and
how it is financed
 Client’s business model
 Major customers and suppliers
 Types of transactions
 How transactions are accounted for
 Understanding of:
i. Production processes
ii. Marketing processes
iii. Distribution processes
iv. Customer service processes
v. Human resources and R&D processes
revaluation Matters an auditor may consider:
 Nature of revenue resources
 Products or services and markets
 Conduct of operations
 Alliances, joint ventures, and
outsourcing activities
 Involvement in electronic commerce,
including internet sales and
marketing activities
 Geographic dispersion and industry
Business
segmentation
Operations
 Location of production facilities,
warehouses, and offices
 Key customers
 Important suppliers of goods and
services
 Employment
 Research and development activities
and expenditures
 Transactions with related parties
 Acquisitions, mergers, or disposal of
business activities
 Investments and dispositions of
securities and loans
 Capital investment activities,
including investments in plant and
Investments
equipment and technology, and any
recent or planned changes
 Investments in non-consolidated
entities, including partnerships, joint
ventures and special-purpose
entities
 Group structure—major subsidiaries
and associated entities, including
consolidated and nonconsolidated
Financing
structures
 Debt structure, including covenants,
restrictions, guarantees, and off-
 statement of financial position  Existence of objectives relating to:
financing arrangements i. Industry developments
 Leasing of PPE for use in business ii. New products and services
 Beneficial owners
iii. Expansion of the business
 Related parties
iv. New accounting requirements
 Use of derivative financial
instruments v. Regulatory requirements
 Accounting principles and industry vi. Use of IT
specific practices  Effects of implementing a strategy, particularly
 Revenue recognition practices any effects that will lead to new accounting
 Accounting for fair values requirements
 Inventories
 Foreign currency assets, liabilities,
D. Measurement and review of the entity’s financial
Financial and transactions
Reporting  Industry-specific significant performance
categories  The auditor should obtain an understanding of
 Accounting for unusual or complex the abovementioned matters
transactions including those in  Performance measures, whether external or
controversial or emerging areas internal, create pressures on the entity that, in
 Financial statement presentation and
turn, may motivate management to take action
disclosure
to improve the business performance or to
misstate the financial statements
C. Objectives and strategies and related business risks
 Variety of measuring techniques: budgets, key
 The auditor should obtain an understanding of
performance indicators, variance analysis, and
the abovementioned matters that may result in
segment performance reports
FS MM
 Management’s measurement and review of the
 Strategies—are the operational approaches by
entity’s FP is to be distinguished from the
which management intends to achieve its
monitoring of controls
objectives
 Monitoring of controls, however, is specifically
 Business risks result from significant conditions,
concerned with the effective operation of
events, circumstances, actions or inactions that
internal control through consideration of
could adversely affect the entity’s ability to
information about the control and not about
achieve its objectives and execute its strategies.
financial performance
Or through the setting of inappropriate
 The measurement and review of performance is
objectives and strategies
directed at whether business performance is
 An understanding of business risks increases the
meeting the objectives set by management
likelihood of identifying risks of material
 But in some cases, performance indicators also
misstatement
provide information that enables management
 The auditor does not have a responsibility to
to identify deficiencies in internal control
identify or assess all business risks
 Smaller entities ordinarily do not have formal
 Usually management identifies business risks
processes to measure and review the entity’s
and develops approaches to address them
financial performance
 Smaller entities often do not set their objectives
 Examples of matters an auditor may consider
and strategies, or manage the related business
include the following:
risks
i. Key ratios and operating statistics
 In many cases, there may be no documentation
ii. Key performance indicators
of such matters
iii. Employee performance measures and
incentive compensation policies
Examples of matters an auditor may consider:
iv. Trends
 v. Use of forecasts, budgets, and variance
analysis
vi. Analyst reports and credit rating reports
vii. Competitor analysis
viii. Period-on-period financial performance
E. Understanding the client’s internal control
 Internal control is designed to provide
reasonable assurance of achieving objectives
related to reliable financial reporting, efficiency
and effectiveness of operations, and compliance
with applicable laws and regulations
III. Identifying and assessing the risk of material
misstatement
The auditor should identify and assess the risks of
material misstatement at the financial statement level,
and at the assertion level for classes of transactions,
account balances, and disclosures.
The auditor:
 Identifies risks throughout the process of
obtaining an understanding of the entity and its
environment, including relevant controls that
relate to the risks, and by considering the classes
of transactions, account balances, and
disclosures in the 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 financial statements
 Considers the likelihood that the risks could
result in a material misstatement of the FS
As part of the risk assessment, the auditor should
determine which of the risks identified are, in the
auditor’s judgment, risks that require special audit
consideration. PSA 330 (par. 44 & 51) describe the
consequences for further audit procedures of identifying
a risk as significant
 The determination of significant risks, which
arise on most audits, is a matter of the auditor’s
professional judgment
 Routine, non-complex transactions subject to
systematic processing are less likely to give rise
to significant risks because they have lower
inherent risks
 Significant risks are often derived from business
risks that may result in a material misstatement
 In exercising such judgment, the auditor
excludes the effect of identified controls related
to the risk
In considering the nature of the risks, the auditor
considers a number of matters, including the following:
 Whether the risk is a risk of fraud
 Whether the risk is related to recent significant,
economic, accounting or other developments
and, therefore, requires specific attention
 The complexity of transactions
 Whether the risk involves significant transactions
with related parties
 The degree of subjectivity in the measurement
of financial information related to the risk
especially those involving a wide range of
measurement uncertainty
 Whether the risk involves significant transactions
that are outside the normal course of business
for the entity, or that otherwise appear to be
unusual
 Significant risks—relate to significant non-
routine transactions and judgmental matters
 Non-routine transactions—transactions that are
unusual, either due to size or nature, and that
therefore occur infrequently
 Judgmental matters—may include the
development of accounting estimates for which
there is significant measurement uncertainty
 16. Changes in key personnel including departure of
Risks of MM are greater for risks relating to significant key executives
non-routine transactions arising from matters such as 17. Weaknesses in internal control, especially those
the ff.: not addressed by management
 Greater management intervention to specify the 18. Inconsistencies between the entity’s IT strategy
accounting treatment and its business strategies
 Greater manual intervention for data collection 19. Changes in the IT environment
and processing 20. Installation of significant new IT systems related
 Complex calculations or accounting principles to financial reporting
 The nature of non-routine transactions, making 21. Inquiries into the entity’s operations or financial
effective risk control difficult results by regulatory or government bodies
22. Past misstatements, history of errors or a
Risks of MM are greater for risks relating to significant significant amount of adjustments at period end
judgmental matters that require the development of 23. Significant amount of non-routine transactions
accounting estimates arising from matters such as the ff.: 24. Transactions recorded based on mgmt’s intent
 Acctg principles for acctg estimates or revenue 25. Application of new acctg pronouncements
recognition may be subject to various 26. Acctg measurements that involve complex
interpretations processes
 Required judgment may be subjective, complex, 27. Events or transactions that involve significant
or require assumptions about the effects of measurement uncertainty, including acctg
future events (e.g. judgement about FV) estimates
28. Pending litigation and contingent liabilities
PSA 315 provides examples of Conditions and Events that
May Indicate Risks of Material Misstatement:
1. Operations in regions that are economically
unstable
2. Operations exposed to volatile markets
3. High degree of complex regulation
4. Going concern and liquidity issues and loss of
significant customers
5. Constraints on the availability of capital and
credit
6. Changes in the industry of operation
7. Changes in the supply chain
8. Devt and offering of new product or business
line
9. Expanding into new locations
10. Changes in the entity such as large acquisitions
or reorganizations or other unusual events
11. Entities or business segments likely to be sold
12. Complex alliances and joint ventures
13. Use of off-balance-sheet finance, special-
purpose entities, and other complex financing
arrangements
14. Significant transactions with related parties
15. Lack of personnel with appropriate accounting
and financial reporting skills

IV. Identifying and assessing the risk of material
misstatement
The auditor shall evaluate whether, on the basis of the
audit work performed, the auditor has identified a
material weakness in the design, implementation of
maintenance of internal control
 The auditor shall communicate material
weaknesses in internal control identified during
the audit on a timely basis to management at an
appropriate level of responsibility and as
required by PSA 260 (Communication with Those
Charged with Governance)
The types of material weaknesses in internal control
include:
1. Risks of material misstatement that the auditor
identifies and which the entity has not
controlled, or for which the relevant control is
inadequate
2. A weakness in the entity’s risk assessment
process that the auditor identifies as material, or
the absence of a risk assessment process in
those cases where it would be appropriate for
one to have been established
Material weaknesses may also be identified in controls
that prevent, or detect and correct, errors, or those to
prevent and detect fraud.
V. Documentation
The auditor should document:
 The discussion among the engagement team
regarding the susceptibility of the entity’s
financial statements to material misstatement
due to error or fraud, and the significant
decisions reached
 Key elements of the understanding obtained
regarding each of the aspects of the entity and
its environment identified in PSA 315, to assess
the risks of material misstatement of the FS; the
sources of information from which the
understanding was obtained; and the risk
assessment procedures
 The identified and assessed risks of material
misstatement at the FS level and at the assertion
level
 The risks identified and related controls
evaluated
The manner in which these matters are documented is
for the auditor to determine using professional judgment
The form and extent of this documentation is influenced
by the nature, size, and complexity of the entity and its
internal control, availability of information from the
entity and the specific audit methodology and
technology used in the course of the audit.
For an information system with no use of IT and only few
transactions, a memorandum documentation is
sufficient.
The more complex the entity and the more extensive the
audit procedures performed by the auditor, the more
extensive the auditor’s documentation will be.
PSA 230 “Audit Documentation” provides guidance
regarding documentation in the context of the audit of
financial statements
F. Assessing inherent risk and control risk at the
assertion level
 In designing audits, auditors consider factors
that affect the risk of MM at the FS level and at
the assertion level
 In performing audits, auditors test the validity of
FS assertions that relate to classes of
transactions, account balances, and FS
disclosures
 At the assertion level, a misstatement is material
if it exceeds the tolerable misstatement specified
for the assertion
  Risk of the assertion level—the risk that an FS b. Management experience and knowledge
assertion is materially misstated and changes in management during the
 Audit risk—the possibility that the auditors fail period
to appropriately modify their opinion on FS that c. Unusual pressures on management
are materially misstated d. Nature of the entity’s business
 For each FS account, audit risk consists of the e. Factors affecting the industry of
possibility that: operation
i. A material misstatement in an assertion 2. At the account balance and class of transactions
has occurred level
ii. The auditors do not detect the a. FS accounts likely to be susceptible to
misstatement MM
 Risk of material misstatement b. Complexity of underlying transactions
i. Inherent risk—the susceptibility of an and other events which might require
account balance or class of transactions using the work of an expert
to misstatement c. Degree of judgment involved in
ii. Control risk—the risk that a misstatement determining account balances
will not be prevented or detected by the d. Susceptibility of assets to loss or
accounting and internal control systems misappropriation
 Detection risk—the risk that auditors will not e. Completion of unusual and complex
detect the misstatement transctns, particularly at or near period
end
Audit risk = inherent risk x control risk x detection f. Transctns not subjected to ordnry
risk processing

 Inherent risk and control risk differ from Certain characteristics of the client and its industry affect
detection risk in that they exist independently of the inherent risk of a number of FS accounts
the audit of FS
Control risk
 The risk that a material error in an account will
not be prevented or detected on a timely basis
by the client’s system of internal control
 This can never be zero because internal control
systems cannot provide complete assurance that
all material errors will be prevented or detected
 If the auditors find that the client company has
designed effective internal control for a
Inherent risk particular account and that the prescribed
 The susceptibility of an account balance to practices are being consistently followed in day-
material errors assuming the client does not to-day operations, they will assess control risk
have any related internal controls for the related assertions to be low, and thereby
To assess inherent risk, the auditor uses professional accept a higher level of detection risk.
judgment to evaluate numerous factors, examples of
which are: Preliminary assessment of control risk
1. At the FS level 1. The preliminary assessment of control risk is the
a. Integrity of management process of evaluating the effectiveness of an
entity’s accounting and internal control systems
 in preventing or detecting, and correcting
material misstatements
a. There will always be some control risk
2. Preliminary assessment of the control risk, at the
assertion level, for each material account balance
Documentation of understanding and assessment of
control risk
The auditor should document in the audit
working papers:
1. The understanding obtained of the entity’s
accounting and internal control systems
2. The assessment of control risk
Detection risk
 The risk that the auditor’s examination will not
detect a material error in an account balance
 The level of detection risk relates directly to the
auditor’s substantive procedures
 Some detection risk will always be present even
if an auditor were to examine 100% of the
account balance or class of transactions because,
for example, most audit evidence is persuasive
rather than conclusive
 Detection risk is restricted by performing
substantive tests
 The auditor should consider the assessed levels
of inherent and control risks in determining the
nature, timing, and extent of substantive
procedures required to reduce audit risk to an
acceptably low level
 There is an inverse relationship between the
detection risk that the auditor can accept for an
account and the inherent and control risk for
that account
 Detection risk is controllable by the auditor while
inherent and control risks relate to the client’s
circumstances
 When the auditor determines that DR regarding
an FS assertion for a material account balance or
class of transactions cannot be reduced to an
acceptable level, the auditory should express a
qualified opinion or a disclaimer of opinion
G. Using the audit risk model to determine the nature,
timing, and extent of audit procedures
 Audit risk = IR x CR x DR
 Auditors use this model to determine the nature,
timing, and extent of audit procedures to
manage and control audit risk
Steps followed in using the audit risk model to
determine allowable detection risk:
Solve
equation
to
Determin Assess Assess
determin
e planned inherent control
e
audit risk risk risk
allowable
detection
risk
Step 1. Determine Planned Audit Risk.
 Plan the audit risk for each financial statement
assertion. This is referred to as planned audit risk
or acceptable audit risk
 Overall assessment of each factors is highly
subjective
 A low acceptable audit risk assessment means a
“risky” client requiring more extensive evidence,
assignment of more experience personnel,
and/or more extensive review of working papers
Step 2. Assess Inherent Risk.
 The assessment of inherent risk implies that the
auditor attempts to predict where misstatements
are most and least likely in the FS segments
  There is always some risk that the client has
made misstatements that are individually or
collectively large enough to make the FS
misleading
 At the start of the audit there is not much that
can be done about changing inherent risk.
Instead, the auditor must assess the factors that
make up the risk and modify audit evidence to
take them into consideration
 Major factors that should be considered when
assessing inherent risk:
i. Nature of the client’s business
ii. Integrity of management
iii. Client motivation
iv. Results of previous audits
v. Initial versus repeat engagement
vi. Related parties
vii. No routine transactions
viii. Susceptibility to defalcation
ix. Judgment required to correctly record
account balances and transactions
x. Make up of population
 The relationship of inherent risk to planned
detection risk is inverse
 The relationship of inherent risk to planned
evidence is direct
Step 3. Assess Control Risk.
 Control risk represents
i. An assessment of whether a client’s
internal controls are effective for
preventing and detecting misstatements,
and
ii. The auditor’s intention to make that
assessment at a level below the maximum
as part of the audit plan
 If the auditor concludes that internal controls are
ineffective, the auditor would assign a high
(100% maximum level) risk factor to control risk
to prevent or detect misstatement
 Before auditors can set control risk less than
100%, they must:
i. Obtain an understanding of internal
control
ii. Evaluate how well it should function based
on the understanding
iii. Test the internal controls for effectiveness
 The first of these is the understanding
requirement that relates to all audits
 The last two are the assessment of control risk
steps that are required when the auditor chooses
to assess control risk below maximum
Step 4. Determinable Allowable Detection Risk.
 Allowable detection risk or planed detection risk
is the amount of risk the auditor can allow for an
assertion or a measure of the risk that audit
evidence for a segment will fail to detect
misstatements exceeding a tolerable amount,
should such misstatements exist
 Planned detection risk
i. Is dependent on the other three factors in
the model
ii. It determines the amount of substantial
evidence that auditors plan to accumulate,
inversely with the size of planned
detection risk
PDR = AAR / (IR x CR)
 Regardless of the assessed levels of inherent and
control risk, the auditory should perform some
substantive procedures for material account
balances and classes of transactions
 When the auditor determines that the detection
risk regarding an FS assertion cannot be reduced
to an acceptable level, the auditor should
express a qualified opinion or a disclaimer of
opinion
 After accumulating evidence, auditor would
compare achieved audit risk with planned audit
risk.
 If AAR ≤ PAR, it means that the auditor has
accumulated sufficient evidence for the assertion
AcAR = IR x CR x AcDR
 The auditor can reduce achieved detection risk
only by accumulating substantive evidence,
analytical procedures, and tests of details of
balances
 The auditor can reduce control risk by more
extensive tests of controls if the client has
effective controls
  Combining IR, CR, and AcDR subjectively to
achieve an acceptably low audit risk requires
considerable professional judgment.

Audit risk in the small business

 The auditor needs to obtain the same level of
assurance in order to express an unqualified
opinion on the FS of both small and large
entities.
 However, many internal controls which would be
relevant to large entities are not practical in the
small busienss
Chapter 12: Fraud and Error - Omitting, advancing, or
delaying recognition in
Introduction the FS of events
- Concealing facts that
 PSA 240: The Auditor’s Responsibility to Consider
could affect amounts in
Fraud in an Audit of Financial Statements
the FS
 Fraud—intentional - Engaging in complex
 Error—unintentional transactions to
 Two types of intentional misstatements (fraud) misrepresent the
i. Fraudulent financial reporting position of performance
ii. Misappropriation of assets of entity
- Altering records and
 Fraud (both FFR and MOA) involves:
terms
i. Incentive or pressure
ii. Opportunity Responsibility for the Prevention and Detection of Fraud
iii. Rationalization  Rests with the management and those charged
with governance
Fraudulent financial Misappropriation of  Fraud prevention—reduce opportunities for
reporting assets
fraud to take place
Intentional misstatements Theft of an entity’s assets
 Fraud deterrence—persuade individuals not to

Omission of amounts or Perpetrated by commit fraud because of likelihood of detection

disclosures in the FS employees in small and and punishment
immaterial amounts Responsibilities of the auditor
Window-dressing  Auditor is responsible for obtaining reasonable
Can also involve assurance that the financial statements taken as
Achieved by: management
a whole are free from material misstatement,
- Manipulation,
whether caused by fraud or error
falsification, forgery, or Achieved by:
alteration of acctg - Embezzling receipts Risk assessment
records or supporting - Stealing physical assets  The auditor should assess the risk that fraud and
documentation or intellectual property error may cause the FS to contain material
- Misrepresentation in, or - Causing an entity to pay misstatements
intentional omission for G&S not received  Conditions or events which increase the risk of
from, the FS of - Using entity assets for
fraud and error include:
significant info personal use
i. Questions with respect to the integrity
- Intentional
misapplication of acctg Accompanied by false or or competence of management
principles relating to misleading records or ii. Unusual pressures within or on an entity
amts, classifctn, manner documents iii. Unusual transactions
of prsntation, or iv. Problems in obtaining sufficient
disclosure appropriate evidence
Detection
Involves management
override of controls  The auditor seeks sufficient appropriate evidence
that fraud and error have not occurred and that
Techniques: they would be properly reflected in the FS
- Recording fake journal otherwise
entries  Likelihood of detecting errors > detecting fraud
- Inappropriately
Inherent Limitations of an audit
adjusting assumptions
 There is unavoidable risk that some material
and changing
judgments misstatements will not be detected
  Risk of not detecting material misstatement from
fraud > risk of not detecting material
misstatement from error
If there are conditions that increase the potential for
financial statement misstatements, the auditors should:
1. Increase the level of professional skepticism
2. Assign personnel with knowledge, skill, and
ability commensurate with the risk
3. Give additional consideration to the entity’s
selection of accounting principles
4. Consider the controls the entity has for
addressing the fraud risk and management’s
ability to override such controls
5. Obtain more reliable or corroborative evidence,
conduct tests closer to year-end, and increase
the amount of evidence gathered

BORDERLINE
 RISK FACTORS RELATING TO MISSTATEMENT ARISING
FROM FRAUDULENT FINANCIAL REPORTING
Incentives and pressures:
1) Threatened financial stability or profitability due to
economic, industry, or entity operating conditions
2) Excessive pressure from management to meet the
requirements or expectations of third parties
3) Threated personal financial situation of management
or those charged with governance relative to the
entity’s financial performance
Opportunities:
1) Nature of the industry or the entity’s operations
provides opportunities to engage in FRR
2) Ineffective monitoring of management
3) Complex and unstable organizational structure
4) Deficiency in internal control components
Attitudes and rationalizations:
Check page 535
RISK FACTORS RELATING TO MISSTATEMENT ARISING
FROM MISAPPROPRIATION OF ASSETS
Incentives and pressures:
1) Personal financial obligations may create pressure
on management or employees with access to cash
or other assets susceptible to theft to
misappropriate those assets
2) Adverse relationships between the entity and
employees with access to cash or other assets
susceptible to theft may motivate those
employees to misappropriate those assets
Opportunities:
1) Certain characteristics or circumstances may
increase the susceptibility of assets to
misappropriation.
2) Inadequate internal control over assets may
increase the susceptibility of misappropriation of
those assets
Attitudes/Rationalizations:
Check page 538

TYPES OF ERRORS AND IRREGULARITIES IN THE TRANSACTION CYCLES OF THE BUSINESS ENTITY AND THE AUDITOR’S RESPONSIBILITY
Acquisitions and Payroll and Personnel Inventory
Sales and Collections Cycle Investing Activities Financing Activities
Payments Cycle Cycle Warehousing
1) Errors in sales and 1) Errors in the 1) Errors 1) Errors affecting 1) Errors affecting 1) Errors related to
collections acquisitions and 2) Frauds inventory investing financing
2) Frauds in sales and payments cycle  Fictitious 2) Irregularities transactions activities
collections 2) Frauds in the employees affecting 2) Major frauds 2) Irregularities
 Fraudulent acquisitions and  Excess inventory involving  Diverting
financial payments cycle payments  Inventory investing proceeds
reporting  Paying for to theft activities  Covering
 Misappropriation fake employees  Overstatem  Inventory up failure
of assets: purchases  Failure to ent of theft  Failing to
withholding cash  Receiving record inventory record
receipts kickbacks payroll obligations
Skimm  Purchasing  Inappropria  Failing to
ing goods for te record
Lappin personal assignment interest
g use of labor  Paying
Kiting costs to dividends
inventory to
inappropria
te parties
Procedures When Errors or Irregularities are suspected
 There should be alterations in the following to
respond to elevated risks:
i. Engagement staffing
ii. Extent of staff supervision
iii. Degree of professional skepticism
applied
iv. Overall strategy for the expected
conduct and scope of the engagement
 The extent of such modified or additional
procedures depends on the auditor’s judgment
as to:
i. The types of fraud and error indicated
ii. The likelihood of their occurrence
iii. The likelihood that a particular type of
fraud or error could have a material
effect on the financial statements

BORDERLINE
PSA Summary o PSA 200
o Overall Objectives of the Independent
 PSA Auditor and the Conduct of an Audit in
o Philippine Standard on Auditing Accordance with Philippine Standards
 PSRE on Auditing
o Philippine Standards on Review  Revised Code of Ethics for Professional
Engagements Accountants in the Philippines
 PSAE  Institute of Auditor’s Statement of
o Philippine Standard on Assurance Responsibilities
Engagements  Three divisions of state audit
o Primer
Chapter 2 o Government Accounting and Auditing in
 Scope of the practice of public accountancy the Philippines
o Section 4 o By the PICPA Committee on GAAS
o Philippine Accountancy Act of 2004 (Government Accounting and Auditing
 Prohibitions on the usage of the CPA title Standards) in 1984
o Article IV, Section 26  Creation of the Commission on Audit
o Philippine Accountancy Act of 2004 o Sec. 1, Art. XII-D of the Philippine
 PRC Constitution
o PRC Modernization Act of 2000  PSA 720—audits of information accompanying
 BOA the basic financial statements for special audits
o Philippine Accountancy Act of 2004  PSAs 800, 805, 810—standards in connection
 Assurance with special purpose audit engagements
o Philippine Framework for Assurance
Engagements
o 2006
 Review of Financial Statements
o PSRE 2400
o PSRE 2410
 Other Assurance Services
o PSAE 3000
 Assurance services on other types of information
o Special Committee on Assurance
Services of the AICPA
 Compilation Services
o PSRS 4410 (formerly PSA 930)
Chapter 3
 Objective of Auditing
o PSA 120
o Framework of Philippine Standards on
Auditing
 AASC Standards
o Preface
o Philippine Standards on Quality Control,
Auditing, Review, Other Assurance and
Related Services
 Overall Objectives of the Auditor