LESSON 1: Practice of the accountancy profession

• Professional Framework – engagement standards

- Judgement of the auditor is the hallmark of auditing, that will define if it is independent
both ways.
- If we are not independent, we cannot provide opinion.
- Assurance (Independence and opinion required)– PSA (Phil. Standard on Auditing),
PSRE (Phil Standard on Review engagement), PSAE (Phil. Standard on Other
Assurance Engagement)
- Non-assurance (Independence and opinion will not be required)– Phil. Standard on
Related Services

• Regulatory Framework – ethical framework (2018 Revised Philippine Code of Ethics

for Professional Accountants of the Philippines patterned from 2016 IFAC code of

ethics)

- Only Sole Proprietorship and Partnership is allowed

- Ethical framework is divided into 2: FUNDAMENTAL and ESSENTIAL PRINCIPLE

- Fundamental (POPIC)

o PROFESSIONAL COMPETENCE – attain important segments in order to be

considered competent

o OBJECTIVITY - free from bias

o PROFESSIONAL BEHAVIOR

o INTEGRITY - straightforward and honesty

o CONFIDENTIALITY - we shouldn’t divulge info w/o client’s consent

- Essential principle – Independence in FACT and in MIND

• Legal Framework – RA 9298 (Phil. Accountancy Act of 2004), RA 10912 (CPD Law

– 120 units)

1. Public Practice Sector (2004)

2. Commerce and Industry Sector (2016)

4. Government Sector

ENGAGEMENT STANDARDS – contain (Basic Principles and Essential Procedures)

- Provide pronouncements on generally accepted auditing standards,

independent examination of FS of any entity (micro entity – less than 3m of

asset, small entity – asset of 3m to 100m, medium – excess of asset of 100m

up to 350m (PFRS for SMEs), large – excess of asset of 350m (FULL PFRS))

- Auditing and Assurance Standards Councils (AASC) is tasked to develop the

engagement standards which shall be generally accepted by the profession in

the Philippines.

- AASC replaced the old body ASPC

- AASC was created by PRC thru BOA

- Standards were patterned from International Engagement Standards

PSA – audit of historical financial information is the subject matter (extended scope)

PSRE – review of historical financial information is subject matter (limited scope)

PSAE – other than historical financial information

Prospective forecast can be audited (reasonableness of assumption and consistent

with historical)

Behavior can be audited if there is a framework, System can be audited. Process can

be audited. Other financial info (efficiency and effectiveness) can be audited.

PSRS – compilations and agreed upon procedures

Assurance engagements:

• Audits

• Reviews

• Other assurance engagements

Classification of Assurance Engagement

1. Level of Assurance

a. Reasonable Assurance – opinion is high but not absolute (AUDIT – scope:

risk assessment, test of control, substantive tests) (Subject matter: historical

or other than historical), ABSOLUTE is never attainable

▪ Objective: reduction in assurance engagement risk to an

acceptably low level (sufficient and appropriate evidence) in the

circumstances of the engagement as the basis for a positive

form of expression of the practitioner’s conclusion.

Scope of audit - procedures deemed necessary in the circumstances

to achieve the objective of the audit

▪ Risk assessment procedures - initial procedures; required

▪ Tests of control - further audit procedures; not required

▪ Substantive tests - further audit procedures; required

a. Confirmation

b. Inquiry

c. Analytical
 b. Limited Assurance – opinion is moderate and plausible (REVIEW – scope:

inquiry and analytical procedures (limited substantive test)) (Subject matter:

historical or other than historical)

▪ Objective: reduction in assurance engagement risk to a level that

is acceptable in the circumstances of the engagement, but where

that risk is greater than for a reasonable assurance engagement,

as the basis for a negative form of expression of the

practitioner’s conclusion

2. Structure

a. Assurance based - access of subject matter by third parties

b. Direct reporting - only between parties involved

Limitations of audit

1. Nature of evidence – persuasive evidence

2. Human error – cannot be avoided

Controlling of Human error:

a. Direction

b. Supervise

c. Review

3. Sampling – if removed, can give absolute assurances

4. Internal controls – management’s prerogative

1. Modified – (materiality) if there are material misstatements

a. Qualified – “except for” opinion

b. Adverse -

c. Disclaimer –

2. Unmodified – standard/unqualified

Two Situations where FS is not fairly stated, and adverse opinion should be given

1. Inadequate disclosure (example: intangibles, investment property)

2.

Two occasions when auditor cannot express opinion

1. When the auditor is not independent

2. When the auditor was not able to gather sufficient evidence

Elements of Assurance Engagements

1. Three party contract

a. Practitioner – auditor

b. Responsible party – management

c. Intended Users - public

2. Appropriate subject matter – procedures and framework

a. Financial performance or conditions

i. Historical

ii. Prospective

b. Nonfinancial performance or conditions

i. Plant layout

d. System and processes

i. IT systems

e. Behavior

i. Governance

3. Suitable criteria (CRRUN)

a. Completeness

b. Relevance

c. Reliability

Most reliable evidence:

i. External Source

ii. Internal Source

iii. Acquired directly

iv. Evidence documented

v. Original evidence

d. Understandability

e. Neutrality

4. Sufficient and appropriate evidence

a. Sufficiency – quantity

b. Appropriateness - quality

5. Written assurance report - attestation report (independent auditor’s report)

- Compilations

- Agreed upon procedures

- Tax Consulting

- Management Advisory Services

Assurance engagement risk

– risk that subject matter info. Is materially misstated; uncontrollable

a. Inherent Risk

b. Control Risk

- Risk that auditor’s procedures may not be able to detect

a. Detection Risk

INTRODUCTION TO AUDITING

- Auditing is a systematic process of objectively obtaining and evaluating

evidence regarding selected 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.

Assertions – claims of the management

1. Account Balances – (ex. Completeness, Existence, Valuation)

2. Classes of transactions – income statement items (ex. Occurrence, Proper

Classification, Cut-off, Accuracy)

3. Presentation and disclosure – ex. Occurrence, Completeness, Accuracy

Phases of Audit:
• Risk Assessment

1.) Pre-engagement

2.) Audit Planning

• Risk Response

3.) Study and Evaluation of Internal Control

4.) Substantive Testing

• Risk Reporting

5.) Completing audit

6.) Issuance of audit report

7.) Post-audit responsibilities