LESSON TOPIC MEANING

4 1. Financial Assertions about classes of transactions and events for the period under audit
statement (INCOME STATEMENT)
assertions - Occurrence – transactions and event that have been recorded have
occurred and pertain to the entity (Salaries & wages expense has been
incurred during the period in respect of the personnel employed by the
entity. Salaries and wages expense does not include the payroll cost of any
unauthorized personnel.)
- Completeness – all transactions and events that should have been
recorded have been recorded (Salaries and wages cost in respect of all
personnel have been fully accounted for.)
- Accuracy – amounts that other data relating to recorded transactions and
events have been recorded appropriately (Salaries and wages cost has
been calculated accurately.)
- Cutoff – transactions and events have been recorded in the correct
accounting period (Salaries and wages cost recognized during the period
relates to the current accounting period. Any accrued and prepaid expenses
have been accounted for correctly in the financial statements)
- Classification - transactions and events have been recorded in the proper
accounts (Salaries and wages cost has been fairly allocated between:
Operating expenses incurred in production activities; General and
administrative expenses)

Assertions about account balances at the period end (BALANCE SHEET)

- Existence – assets, liabilities, and equity interest exists
- Rights and obligations – the entity holds or controls the rights to assets
and liabilities are the obligations of the entity.
- Completeness - All assets, liabilities and equity interests that’s should have
been recorded have been recorded.
- Valuation and allocation – assets, liabilities and equity interest are
included in the financial statements at appropriate amounts and any
resulting valuation or allocation adjustments are appropriately recorded

Assertions about presentation and disclosures

- Occurrence and rights and obligations – disclosed events, transactions,
and other matters have occurred and pertain to the entity
- Completeness – all disclosures that should have been included in the
financial statements have been included
- Classification and understandability – financial information is
appropriately presented and described, and disclosures are clearly
expressed
- Accuracy and valuation – financial and other information are disclosed
fairly and at appropriate amounts
2. Accepting an requires the evaluation of the auditor’s qualifications as well as the auditability of
engagement the prospective client’s financial statement. Preliminary understanding of the
client’s business and background investigation of a prospective client are usually
performed at this stage of the audit.
 -The procedures performed at this stage of the audit are referred to in PSA 300
“preliminary planning activities” These procedures involve:

a. Performing procedures regarding the continuance of the client relationship and

the specific audit engagements
b. Evaluating compliance with ethical requirements , including independence
c. Establishing an understanding of the terms of the engagement

-According to the firm’s quality control policies and procedures, there must be a
system for deciding whether to accept or reject an audit engagement. Making this
decision the firm should consider the following

*Not all audit engagements are to be accepted by the auditors.

Competence- one of the primary considerations before accepting an audit
engagement is to determine whether the auditor has the necessary skills and
competence to handle the engagement. Before accepting an audit engagement,
the auditor should obtain a preliminary knowledge of the client’s business and
industry to determine whether the auditor has the degree of competence

The standards states that the accountant should not portray themselves as having
expertise which they do not possess.
Independence – Before accepting and audit engagement, the auditor should
consider whether there are any threats in the audit team’s independence and
objectivity and, if so, whether adequate safeguards can be established.

Ability to serve the client properly

Integrity off the management
3. Ability to serve PSA 220 suggests that audit work should be assigned to personnel who have the
the client appropriate capabilities, competence and time to perform the audit engagement in
properly accordance with professional standards. In addition, there should be sufficient
direction, supervision and review of work at all levels in order to provide
reasonable assurance that the firm’s standard of quality is maintained in the
performance of engagement.

4. Integrity of the -PSA 220 requires the firm to conduct a background investigation of the
prospective prospective client in order to minimize the likelihood of association with clients
client and whose management lacks integrity.
management
-Make inquiries of appropriate parties in the business community such as
prospective clients, bankers, legal counsel, or underwriter to obtain information
about the reputation of the client.

-Communication with predecessor auditor. This is not only a matter of courtesy, but
it also allows the incoming auditor to obtain information about the client that will
be useful in determining whether the engagement will be accepted.
 -The incoming auditor should obtain client’s permission to communicate with the
predecessor auditor. Refusal of the prospective client’s management to permit this
will raise serious questions as to whether the engagement will be accepted.

-Possible questions that are the following

• The predecessor auditor’s understanding as to the reasons for the change of
auditors.
• Any disagreement between the predecessor auditor and the client
• Any facts that might have a bearing on the integrity of the prospective client’s
management.
-The Code of Ethics requires the predecessor auditor to respond fully to the
incoming auditor’s inquiry and advise the incoming auditor if there are any
professional reasons why engagement should not be accepted.

5. Engagement -written contract between the auditor and the client

letter
➢ Objective and Scope – which is to express an opinion in the financial statement
➢ The management responsibility for the fair presentation of the financial
statement
➢ The scope of the audit
➢ The forms or any reports or other communication that the auditor expects to
issue.
➢ The fact that because of the limitations of the audit, there is an unavoidable risk
that material misstatements may remain undiscovered.
➢ The responsibility of the client is to allow the auditor to have unrestricted access
to whatever records, documentation and other information requested in
connection with the audit.
Additional Contents:
1. Billing arrangements
2. Management written representation
3. Arrangements including the involvement of the experts
4. Acknowledgement from management
6. Audit planning the auditor obtains more detailed knowledge about the client’s business and
industry in order to understand the transactions and events affecting the financial
statement and to identify potential problems that might be encountered during the
audit. Audit planning involves developing a general audit strategy and detailed
approach for the expected conduct of the audit. The auditor’s main objective in
planning the audit is to determine the scope of the audit procedures to be
performed.

- Audit Planning involves:

1. establishing the general audit strategy for the engagement; and
2. developing an audit plan.
Objective of audit plan: determine the scope of the audit procedures to be
performed
7. Inherent risk, Inherent risk the susceptibility of an account balance or class of transactions to a
control risk material misstatement assuming that there were no related internal controls. In
this concept it recognizes that some account balances, by nature are more
susceptible to misstatement than others.

PSA 315 requires the auditor to assess inherent risk at FS level and account
balance/transaction level. Factors that affect the risk of misstatement at FS level
include:
Management integrity
Management Characteristics (e.g. aggressive attitude toward financial reporting)
Operating Characteristics (e.g. profitability of the entity relative to its industry)
Industry Characteristics (e.g. industry is experiencing a large no. of business
failures)

Factors affecting inherent risk at the account balance level include:

1. Susceptibility of the account to theft.
2. Complexity of calculations related to account
3. The complexity underlying transactions and other events.
4. The degree of judgment involved in determining account balances.

Control risk – the risk that a material misstatement that could occur in an account
balance or class of transactions will not be prevented or detected and corrected on
a timely basis by accounting and internal control systems. This is related to the
effectiveness of the client’s internal control. If the entity’s internal control is
effective, the assessed level of control risk decreases (and vice versa). As the
assessed level of control risk increases, the auditor should design more effective
substantive procedures.

We cannot control these risks

8. Audit risk
model

Steps in using the audit risk model

Step 1 Set the desired level of a Audit Risk

-The auditor uses his judgement in determining the risk that he is willing to take of
accepting an assertion as fairly stated when in fact it is material misstated.
Step 2 Asses the level of Inherent risk
-In assessing this risk the auditor will rely primarily on his knowledge of the client’s
business and industry, and the results of his preliminary analytical procedures.
Step 3 Asses the level of Control risk
 -This will involve studying and evaluating the effectiveness of the client’s
accounting and internal control systems.
Step 4 Determine the Acceptable level of detection risk
-Based on the desired audit risk level (Step 1) and the auditor’s assessment of
inherent and control risk (Step 2 and 3), the auditor determines the acceptable
level of detection risk. By rearranging the audit risk model.
Detection risk = Audit risk / inherent risk x control risk
Step 5 Design substantive test
-Unlike inherent risk and control risk, detection risk can be increased or decreased
by the auditor by performing substantive test

9. Materiality -Information is material if its omission or misstatements could influence the

economic decision of users taken on the basis of the financial statements. At the
planning stage, the auditor should make a preliminary estimate of materiality for
use during examination. Materiality may be viewed as:

• The largest amount of misstatement that the auditor could tolerate in the
financial statement
• The smallest total amount that could misstate the financial statements

-Auditor’s determination of materiality is a matter of professional judgment and

necessary involves quantitative factors ( amount of the item in relation to the
financial statements) and qualitative factors (the nature of misstatement)
-The auditor should make a preliminary estimate of materiality to determine the
amount of evidence to accumulate. There is an inverse relationship between the
materiality and evidence.

Planning stage – determine the scope of audit procedures

Completion stage – evaluate the effect of misstatement on the financial statement
- The first step in determining materiality level is determining the overall
materiality in a financial statement level, your basis can be the total assets, total
sales or net income by certain percentage. The percentage will be dependent on
your judgement. Most of the times, it will be practical that the basis of the
materiality level is the assets and the total sales, because sometimes the entity
does not have income. Let say your basis for the materiality level is 5% of total
assets, and you total assets is 1,000,000 therefore your 50,000 is the overall
materiality at financial statement level. Please take note that the percentage and
the basis can change according to auditor’s judgement.
10. Analytical -This involves analysis of significant ratios and trends, including the resulting
procedures in investigation of fluctuations and relationships that are inconsistent with other
planning stage relevant information or deviate from predicted amounts. PSA 520 requires the
auditor to use analytical procedures in the planning and overall review stages of
the audit.
-Analytical procedures help the auditor in identifying unusual transactions and
event s that may affect the fair presentation of the financial statements.
-Steps in Applying Analytical Procedures
Step 1 Develop expectation regarding financial statements
 Step 2 Compare the expectations with the financial statements under audit
11. Nature of According to PSA 315, internal control is the process designed and effected by
internal control those charged with governance, management, and other personnel to provide
reasonable assurance about the achievement of the entity’s objectives with regard
to reliability of financial reporting effectiveness and efficiency of operations and
compliance with applicable laws and regulations

Internal control as a process

- Means of achieving entity’s objectives
Internal control is effected by those charged with governance, management and
other personnel.
- Those charged with governance responsibility is make sure the integrity of
accounting and financial reporting systems through oversight of management.
- Management responsibility is to establish a control environment and maintain
policies and procedures to assist in achieving the entity’s objective
- Staff personnel should perform their respective functions in order to accomplish
the objectives of the entity.
Internal control can be expected to provide reasonable assurance of achieving
entity’s objectives. Because of the inherent limitations that may affect the internal
control’s effectiveness.
- Cost of the internal control should not exceed the expected benefits to be
derived.
- Most internal controls tend to be directed at routine transactions rather than
non-routine transactions.
- Potential for human error due to carelessness, distraction, mistakes of judgement
or misunderstanding of instructions
- The possibility of collusion among employees
- The possibility of overriding of internal control of the management .
- The possibility that procedures may become inadequate due to changes in
conditions, and compliance with procedures may deteriorate.
Internal control is designed to help achieve the entity’s objectives
12. Control risk -After obtaining and documenting the auditor’s understanding of the accounting
and internal control systems, the auditor should make preliminary assessment of
control risk, at the assertion level, The auditor’s preliminary assessment of control
risk may be at a high level (100%) or less than high level.
-When the auditor’s knowledge of the entity’s internal control indicates that
internal controls related to a particular assertion are not effective, the auditor may
simply assess control risk at a high level. Hence, no test of controls need to be
performed and the auditor will rely primarily on substantive tests.
-On the other hand, if the auditor believes that controls appear to be reliable, the
auditor would plan to assess control risk at less than high level. For this purpose,
the auditor should
• Identify specific internal control policies or procedures that are likely to prevent
or detect and correct material misstatement relevant to financial statement
assertion and
• Perform test of controls to determine the effectiveness of such policies and
procedures.
13. Test of control -Before an auditor can rely on the internal control and reduce the substantive test,
the auditor must test these controls to obtain evidence that they are working
effectively as the preliminary assessment suggests.
-The test of controls are performed to obtain evidence about the effectiveness of the:
• Design of the accounting and internal control systems; or
• Operation of the internal control through out the period.
-The auditor should only test the controls if he/she is planning to rely upon the
internal control. PSA requires the auditor to obtain audit evidence through test of
control to support any assessment of control risk at less than high level. The lower
the assessment of the control risk the more support the auditor should obtain that
the internal control is suitably designed and operating effectively. The greater the
reliance to internal control the more extensive the test of those controls that need
to be performed.
Nature of test of controls
1. Inquiry – searching appropriate information about the effectiveness of internal
control from knowledgeable person inside and outside the entity.
2. Observation – refers to looking at the process being performed by others.
3. Inspection – involves examination of documents and records to provide
evidence of reliability depending on their nature and source and the effectiveness
of internal control over their processing.
4. Reperformance – involves repeating the activity performed by the client to
determine whether proper results were obtained.

Timing of Test of Controls.

-Auditors usually perform test of controls during an interim visit in advance of
period end. But further evidence is needed relating to the remainder of the
period, to determine whether there is changes affecting the entity’s internal
control system.
Extent of test of control
-Since the auditor cannot possibly examine all transactions related to certain
control procedures. The auditor should determine the size of a sample sufficient to
support the assessed level of control risk.
14. Audit Inspection involves examining of records, documents, or tangible assets
procedures Observation consists of looking at a process or procedure being performed by
others
Inquiry consists of seeking information from knowledgeable persons inside or
outside the entity.
Confirmation consist of the response to an inquiry to corroborate information
contained in the accounting records.
Computation consists of checking the arithmetical accuracy of source documents
and accounting records or performing independent calculations
Analytical procedures consists of the analysis of significant ratios and trends
including the resulting investigation of fluctuations and relationships that are
inconsistent with other relevant information or deviate from predicted amounts.

15. Components of -There are essential components of internal control that must be established to
internal control provide reasonable assurance that the entity’s objectives will be achieved.
Five interrelated components of the entity’s internal control,
 1. Control environment- Includes attitudes, awareness, and actions of
management and those charged with governance concerning the entity’s internal
control and its importance in the entity.
2. Risk assessment- risk that the entity’s business objectives will not be attained
as a result of internal and external factors such as technological developments,
changes in customers demand and other economic changes.
3. Information and communication systems- The information system relevant to
financial reporting objectives, which includes the financial reporting system,
consists of the procedures and records established to initiate, record, process, and
report entity transactions and to maintain accountability to the related assets,
liabilities and equity.
4. Control activities- These are policies and procedures that help ensure that
management directives are carried out. The following are the specific control
procedures that are relevant to financial statements audit: performance review,
information processing, physical control, segregation of duties
5. Monitoring- A process of assessing the quality of internal control performance
over time. It involves assessing the design and operation of controls on a timely
basis and taking necessary corrective actions. This is done to ensure that controls
continue to operate effectively. Ongoing monitoring activities are built into the
normal recurring activities of an entity and include regular management and
supervisory activities. Such as preparation of monthly bank reconciliation. Separate
evaluations are monitoring activities that are performed on non-routine basis, such
as functions performed by internal auditors.
16. Test of control -Like manual processing environment, test of control in a CIS environment involves
in CIS evaluating the client’s internal control policies and procedures to determine if they
environment are functioning as intended. The auditors’ objectives and scope of the audit do not
change in a CIS environment. Testing the reliability of the general controls may
include observing client’s personnel in performing their duties, inspecting program
documentation, and observing the security measures in force.
In testing application controls the auditor may either:
1. Audit around the computer, or
2. Use Computer assisted Audit techniques.
17. Internal control -Many of the control procedures used in manual processing also apply in a CIS
in CIS environment. Examples are Authorization of transactions, Proper segregation of
environment duties, and Independent checking. The elements of internal control are the same,
the computer just changes the methods by which these elements are
implemented. When computer processing is used in significant accounting
applications, internal control procedure can be classified into two types general
and application control.
General Controls -This control relates to the overall computer information system.
These controls includes:
1. Organizational controls
a. Segregation between the CIS department and user departments
b. Segregation of duties within the CIS department.
2. Systems development and documentation controls
3. Access Controls
4. Data Recovery Controls
5. Monitoring controls
18. Relationship -Using the information obtained in audit planning and consideration of internal
between control, the auditor performs substantive tests to determine whether the entity’s
substantive test financial statements are presented fairly in accordance with financial reporting
and internal standards. This will involve examination of documents and evidence supporting the
control amounts and disclosures in the financial statements. The extent of the substantive
tests is highly dependent on the results of the auditor’s consideration of internal
control. If the internal control is functioning effectively the scope f substantive test
can be decreased. However, if it is not functioning effectively, you must gather
more evidence.
-Before an auditor can rely on the internal control and reduce the substantive test,
the auditor must test these controls to obtain evidence that they are working
effectively as the preliminary assessment suggests.
The test of controls are performed to obtain evidence about the effectiveness of
the
• Design of the accounting and internal control systems; or
• Operation of the internal control through out the period.
The auditor should only test the controls if he/she is planning to rely upon the
internal control. PSA requires the auditor to obtain audit evidence through test of
control to support any assessment of control risk at less than high level. The lower
the assessment of the control risk the more support the auditor should obtain that
the internal control is suitably designed and operating effectively. The greater the
reliance to internal control the more extensive the test of those controls that need
to be performs.
-Together, they work to ensure the accuracy and reliability of financial statements.
Substantive testing uncovers the truth behind the numbers, while Control Testing
ensures the controls are in place to prevent errors and fraud.
19. Basic steps in 1. Define the purpose (objective) of the audit test (What control or assertion will be
audit sampling tested?)
2. Define the deviation (weakness ng internal control) or misstatement (kalian
magiging misstated ang isang misstatement) condition(What constitutes a
deviation or misstatements?)
3. Identify and understand the relevant population
4. Determine the relevant sampling unit
5. Select an appropriate approach of sampling
6. Determine the sample size
7. Select the sample items
8. Examine and evaluate the evidence for the sample
9. Evaluate the tests results (and whether the use of sampling has provided a
reasonable basis for conclusions about the population)
10. Document the audit sampling performed

The steps above are the same regardless of, the sampling approach selected
whether statistical or non-statistical, the type of audit sampling technique utilized
and whether the test is the performance of test of controls or test of details.
20. Going concern • Financial statements are ordinarily prepared based on going concern basis,
consideration contrary to the quitting concern basis, in the absence of information to the
contrary. This means that the assets and liabilities are recorded on the basis that
 the entity will be able to realize its assets and discharge its liabilities in the normal
course of business.
• Going concern assumption – an entity is ordinarily viewed as continuing in
business for the foreseeable future with neither the intention nor the necessity of
liquidation, ceasing trading or seeking protection from creditors pursuant to laws
and regulations.
Management’s responsibility:
a. Management should assess the entity’s ability to continue as a going concern –
making a judgment about the future outcome of uncertain events or conditions
(for a period of one year from balance sheet date)
b. To disclosure (based on the result of assessment)
Disclosure requirements if FS are not prepared on a going concern basis:
a. The fact that FS are not prepared on a going concern basis
b. The basis on which the FS are prepared, and
c. The reasons why the entity is not regarded as a going concern
10 21. Wrap-up Performing analytical procedures in the overall review at/near the end of the
procedures audit.

Analytical procedures involve analysis of significant ratios and trends including the
resultant investigation of fluctuations and relationships that are inconsistent with
other relevant information or expectation: Analytical procedures are required to be
performed during the planning and overall review stages.

Wrap-up procedures are procedures done at the end of the audit that generally
cannot be performed before the other audit work is complete. These include:
a. Final analytical procedures
PSA 520 states that the auditor should apply analytical procedures at or near the
end of the audit.
Analytical procedures applied in completion phase should focus on: identifying
unusual fluctuations that were not previously identified and assessing the validity
of the conclusions reached and evaluating the overall FS presentation.

b. Evaluation of the entity’s ability to continue as a going concern

The auditor’s responsibility is to consider the appropriateness of mgmt. use of
GC assumption (consider whether there are events that cast a significant doubt
on entity’s ability to continue as going concern and evaluate mgmt.’s assessment of
the entity’s ability to continue as GC)
When evaluating the entity’s GC assumption, the auditor should remember that
the conditions and events that may indicate significant doubt about entity’s
continued existence may be mitigated by other factors (alternatives such as
disposal of assets, obtaining additional capital, etc.)
Effect on the auditor’s report:
If there is reasonable assurance that the entity is going concern, the auditor
should express an UNMODIFIED OPINION.
If there is uncertainty and is adequately disclosed that the entity is going
concern, the auditor should express an UNMODIFIED OPINION WITH EMPHASIS OF
MATTER PARAGRAPH.
 If there is uncertainty and is not adequately disclosed that the entity is going
concern, the auditor should express EITHER QUALIFIED OR ADVERSE OPINION.
If the GC assumption is not appropriate, the FS should be prepared using other
appropriate basis. Otherwise the auditor should issue an ADVERSE OPINION.

c. Evaluating audit findings and preparing a list of potential adjusting entries.

If mgmt. accepts all adjusting entries proposed by the auditor, an UNMODIFIED
OPINION is issued.
If mgmt. refuses to correct the FS, a QUALIFIED OR AN ADVERSE OPINION will be
issued.

Wrap-up procedures, also known as year-end procedures or closing procedures,

are the series of steps taken by businesses or accounting departments at the end of
a reporting period, such as the end of a fiscal year or quarter. These procedures are
designed to ensure that financial records are accurately updated, finalized, and
prepared for the next reporting period.
Wrap-up procedures typically include tasks such as:
1. **Reconciliation:** Ensuring that all financial accounts (bank accounts, accounts receivable,
accounts payable, etc.) are reconciled and any discrepancies are identified and resolved.
2. **Adjustments:** Making any necessary adjusting entries to the financial statements to reflect
accruals, deferrals, and other adjustments for expenses, revenues, and other accounts
3. **Closing Entries:** Posting closing entries to transfer temporary account balances (such as
revenue, expenses, and dividends) to permanent accounts (such as retained earnings) in order to
reset the temporary accounts for the next reporting period.
4. **Financial Statement Preparation:** Compiling financial statements, including the balance sheet,
income statement, and cash flow statement, based on the adjusted account balances.
5. **Review and Analysis:** Reviewing financial statements for accuracy, completeness, and
compliance with accounting standards, as well as conducting any necessary analysis to assess the
financial performance and position of the business.
6. **Documentation:** Documenting the entire wrap-up process, including the rationale behind any
adjustments or entries made, to ensure transparency and facilitate audits or reviews.
8 22. Audit Among other things, audit documentation includes records of the planning and
documentation performance of the work, the procedures performed, evidence obtained, and
and working conclusions reached by the auditor. Audit documentation also may be referred to
papers as work papers or working papers.

The auditor should prepare, on a timely basis, audit documentation that provides:
a. A sufficient and appropriate record of the basis for the auditor’s report; and
b. Evidence that the audit was performed in accordance with PSAs and applicable
legal and regulatory requirements.

Audit documentation:
• It refers to the documentation of audit evidences collected and evaluated by the
auditor to support the audit opinion.
• The records kept by the auditor that documents:
a. The procedures applied
b. The tests performed
c. The information or evidenced obtained, and
d. The conclusions the auditor reached in the engagement
• Also called “working papers” or “workpapers” or audit file

Purposes / functions of audit documentation:

File documentation plays a critical role in the planning and performance of the
audit. During an audit engagement, data are compiled and included in the audit
working papers. It provides the record that work was in fact performed and it forms
the basis for the auditor’s report. It will also be used for quality control reviews,
monitoring of adherence to the accounting firm’s standards, and possibly
inspections by third parties.

To comply with the quality control standards, firms should have policies and
procedures that specifically address engagement documentation. These
documentation policies should be documented and communicated to all staff.

Classification and composition of auditor’s working papers:

A. Continuing engagement (recurring audit):
1. Permanent file – contains information of continuing or long-term significance/
interest to the auditor in performing recurring audits, such as:
a. Information
• Organizational chart
• Analysis of business and industry
• Analyses of long-term accounts (such as PPE, long-term liabilities and of
stockholders' equity accounts)
• Analyses of internal control (flowchart, narrative descriptions, etc.)

b. Copies or extracts of entity’s important legal documents and agreements:

• Corporate charter or articles of Incorporation (or articles of co-partnership) and
by-laws
• Major contracts (such as bond and note indentures)
• Pension plans, stock option plans, profit-sharing plans and employee bonus
• Terms of share capital and bond issues
• Engagement letter

2. Current audit file – contains evidence gathered and conclusions reached

relevant to the audit of a particular year. It is designed to support management
assertions. Includes all papers accumulated during the current year’s audit:
• Copy of the financial statements
• Audit plan and audit programs
• Working (top) trial balance – listing of unadjusted ending balances of accounts
(contains columns for adjusting and reclassifying entries)
• Adjusting and reclassifying entries – adjustments are made to correct material
errors while reclassifications are made to properly present information in the
financial statements
• Lead or top schedule (assembly sheet) – shows the major components of an
amount reported in the financial statements; this working paper show the grouping
of related accounts; it eliminates voluminous details from the auditor’s working
trial balance by classifying and summarizing similar or related items
• Supporting schedules – schedules that support specific amounts on the financial
statements; usually the
largest portion of the audit file
• Audit memoranda – includes documentation on discussions of certain items such
as internal control,
inventory observation, errors identified, and problems encountered
• Account analysis – shows the activity during the period in a particular short-term
account
• Correspondence with other parties such as lawyers, customers, banks, and
management
• Audit notes – used to record items of work to be done and questions concerning
the audit investigation
• Abstract or copies of minutes of board of directors’ meeting
B. One-time engagement – no distinction as to permanent or current file

Other types of files:

1. Tax files – contain file of information on client’s current and income taxes and
other business taxes that may be used as bases for:
a. Preparing current year’s tax returns
b. Preparing other tax-related services
c. Representing the client in tax assessment case
2. Correspondence file – contains all correspondence/letters to or from (or in
behalf of) a client
3. Completion memorandum – a summary that describes the significant matters
identified during the audit and how
they are addressed

Auditor/CPA firm’s responsibility on audit documentation:

1. Policies and procedures: Establishment of policies and procedures on audit
documentation
2. Confidentiality and safe custody: Adopt appropriate procedures for maintaining
confidentiality and safe custody of working papers and
3. Retention of audit documentation: Working papers should be retained by the
auditor for a period of time sufficient to meet the needs of his practice and to
satisfy any pertinent legal requirements of record retention. Retention period
should be no shorter than 5 years from the date of the auditor’s report, or, if later,
the date of the group auditor’s report. The auditor should not delete or discard
audit documentation before the end of its retention period.
4. Completion of final audit file: within 60 days after the date of the auditor’s
report

Elements of working papers:

Working papers should be properly organized to facilitate their review. Working
papers should have the following elements:
 1. Heading – used to properly identify each working paper; it includes the name of
the client, type/title of working paper, description of its content, and the date or
period covered by the examination.
2. Dates and initial of staff and reviewers
3. Indexing – use of lettering or numbering system to aid in cross-referencing to
other working papers
4. Cross-indexing / cross referencing – Audit working papers are indexed by means
of reference numbers. The primary purpose of cross-indexing audit working papers
is to permit cross-referencing and simplify supervisory review by providing a trail
useful to the auditor and supervisors in reviewing the working papers. (For
example, reported findings should be adequately cross-referenced to supporting
documentation.) Audit working papers should have an indexing system that shows
the relationship between findings, conclusions, and the related facts. The main
advantage of properly indexed working papers is to better organize the working
papers.
5. Tick marks – symbols that describe the audit procedures performed. Tick marks
are explained in working papers.

PSA 501 23. Attendance at Attendance at physical inventory counting that involves Inspecting the inventory to
physical ascertain its existence and evaluate its condition, and performing test counts;
inventory Observing compliance with management’s instructions and the performance of
count/ procedures for recording and controlling the results of the physical inventory
Attendance in count; and Obtaining audit evidence as to the reliability of management’s count
inventory count procedures. These procedures may serve as test of controls or substantive
is impracticable procedures depending on the auditor’s risk assessment, planned approach and the
specific procedures carried out.

 Evaluate Management’s Instructions and Procedures - Matters relevant in

evaluating management’s instructions and procedures for recording and controlling
the physical inventory counting include whether they address, for example: The
application of appropriate control activities, for example, collection of used physical
inventory count records, accounting for unused physical inventory count records,
and count and re-count procedures.
 Observe the Performance of Management’s Count Procedures - those relating to
control over the movement of inventory before, during and after the count, assists
the auditor in obtaining audit evidence that management’s instructions and count
procedures are adequately designed and implemented. In addition, the auditor
may obtain copies of cutoff information, such as details of the movement of
inventory, to assist the auditor in performing audit procedures over the accounting
for such movements at a later date.
 Inspect the Inventory - Inspecting inventory when attending physical inventory
counting assists the auditor in ascertaining the existence of the inventory (though
not necessarily its ownership), and in identifying, for example, obsolete, damaged
or aging inventory.
 Perform Test Counts - by tracing items selected from management’s count
records to the physical inventory and tracing items selected from the physical
inventory to management’s count records, provides audit evidence about the
 completeness and the accuracy of those records. If physical inventory counting is
conducted at a date other than the date of the financial statements, the auditor
shall, in addition to the procedures required by paragraph 4, perform audit
procedures to obtain audit evidence about whether changes in inventory between
the count date and the date of the financial statements are properly recorded. For
practical reasons, the physical inventory counting may be conducted at a date, or
dates, other than the date of the financial statements. This may be done
irrespective of whether management determines inventory quantities by an annual
physical inventory counting or maintains a perpetual inventory system. In either
case, the effectiveness of the design, implementation and maintenance of controls
over changes in inventory determines whether the conduct of physical inventory
counting at a date, or dates, other than the date of the financial statements is
appropriate for audit purposes. PSA 330 establishes requirements and provides
guidance on substantive procedures performed at an interim date.

If the auditor is unable to attend physical inventory counting due to unforeseen

circumstances, the auditor shall make or observe some physical counts on an
alternative date, and perform audit procedures on intervening transactions.

If attendance at physical inventory counting is impracticable, the auditor shall

perform alternative audit procedures to obtain sufficient appropriate audit
evidence regarding the existence and condition of inventory. If it is not possible to
do so, the auditor shall modify the opinion in the auditor’s report in accordance
with PSA 705. In some cases, attendance at physical inventory counting may be
impracticable. This may be due to factors such as the nature and location of the
inventory, for example, where inventory is held in a location that may pose threats
to the safety of the auditor. The matter of general inconvenience to the auditor,
however, is not sufficient to support a decision by the auditor that attendance is
impracticable. Further, as explained in PSA 200, the matter of difficulty, time, or
cost involved is not in itself a valid basis for the auditor to omit an audit procedure
for which there is no alternative or to be satisfied with audit evidence that is less
than persuasive.

If inventory under the custody and control of a third party is material to the
financial statements, the auditor shall obtain sufficient appropriate audit evidence
regarding the existence and condition of that inventory by performing one or both
of the following: (a) Request confirmation from the third party as to the quantities
and condition of inventory held on behalf of the entity.; (b) Perform inspection or
other audit procedures appropriate in the circumstances.
24. Auditing The objective of the auditor is to obtain sufficient appropriate audit evidence
estimates about whether: (a) accounting estimates, including fair value accounting estimates,
in the financial statements, whether recognized or disclosed, are reasonable; and
(b) related disclosures in the financial statements are adequate, in the context of
the applicable financial reporting framework.

Nature of Accounting Estimates - Some financial statement items cannot be

measured precisely, but can only be estimated. For purposes of this PSA, such
financial
 statement items are referred to as accounting estimates. The nature and reliability
of information available to management to support the making of an accounting
estimate varies widely, which thereby affects the degree of estimation uncertainty
associated with accounting estimates. The degree of estimation uncertainty affects,
in turn, the risks of material misstatement of accounting estimates, including their
susceptibility to unintentional or intentional management bias.

The measurement objective of accounting estimates can vary depending on

the applicable financial reporting framework and the financial item being reported.
The measurement objective for some accounting estimates is to forecast the
outcome of one or more transactions, events or conditions giving rise to the need
for the accounting estimate. For other accounting estimates, including many fair
value accounting estimates, the measurement objective is different, and is
expressed in terms of the value of a current transaction or financial statement item
based on conditions prevalent at the measurement date, such as estimated market
price for a particular type of asset or liability. For example, the applicable financial
reporting framework may require fair value measurement based on an assumed
hypothetical current transaction between knowledgeable, willing parties
(sometimes referred to as “marketplace participants” or equivalent) in an arm’s
length transaction, rather than the settlement of a transaction at some past or
future date.

A difference between the outcome of an accounting estimate and the amount

originally recognized or disclosed in the financial statements does not necessarily
represent a misstatement of the financial statements. This is particularly the case
for fair value accounting estimates, as any observed outcome is invariably affected
by events or conditions subsequent to the date at which the measurement is
estimated for purposes of the financial statements

DETAILED (READ ASP REVIEWER PSA PAGE 15)

25. Evaluating Management’s expert – An individual or organization possessing expertise in a field
management’s other than accounting or auditing, whose work in that field is used by the entity to
expert assist the entity in preparing the financial statements.

a. 3 26. Using the work The auditor's education and experience enable the auditor to be knowledgeable
2 of an auditor’s about business matters in general. However, the auditor is not expected to have
expert the expertise required to practice other profession occupation. During the audit,
the auditor may need to obtain audit evidence in the form of reports, opinions,
valuations, and statements of an expert. An expert is a person or firm possessing
special skill, knowledge and experience in a particular field other than accounting
and auditing. Common examples of expert's work include:

- Valuation of precious stones, works of arts, real estate, and other

specialized assets
- Determination of amounts using specialized techniques like actuarial
computations
 - Interpretation of technical requirements, regulations, or contracts such as
legal documents or legal title to property

More detailed explanation on page 8 of asp reviewer psa

27. Evaluating and If based on the foregoing assessment, the external auditor decides to use the work
testing the of the internal auditor, the external auditor will have to evaluate and test the
work of an internal auditor's work to confirm its adequacy for the external auditor's purposes.
internal auditor This evaluation may include considering whether the work is performed by
competent persons; sufficient appropriate evidence is obtained; appropriate
conclusions are reached; and exceptions are properly resolved.

Aside from using the work performed by the internal auditors, the external auditor
may also request the assistance of the internal auditors in performing routine or
mechanical audit procedures. This is an acceptable practice provided the external
auditor supervises and reviews the work performed by the internal auditors.

It is important to recognize that all judgments relating to the audit financial

statements are those of the external auditor. The auditor’s responsibility for audit
opinion is not reduced by any use made internal auditing. Accordingly, the auditor's
report on financial statements should not include any reference to the work
performed by internal auditors.
9 28. Audit sampling Audit Sampling – the application of audit procedures to LESS THAN 100% of items
PSA 530 within a population of audit relevance such that ALL SAMPLING UNITS HAVE A
CHANCE OF SELECTION in order to provide the auditor with a reasonable basis on
which to draw conclusions about the enter population. In here, the population
must be complete.

Population – the entire set of data from which a sample is selected and about
which the auditor wishes to draw conclusions.

Rationale for Audit Sampling – auditor may choose to test only a sample of the
population because 100% examination may be impractical (time-constraint,
geographical dispersion, and limited audit staff), and cost inefficient. All audits
involve sampling because of these two reasons. However, 100% examination can
be possible through the use of Generalized Audit Software (GAS) which is a
software program that may facilitate testing of 100% of the population.

Objective of Audit Sampling – audit sampling may be use as a part of the auditor’s
test of controls (attribute sampling) because it tests the operating effectiveness of
the entity’s internal control. It may also be used as part of the auditor’s substantive
procedures (variable sampling) because it directs the evidence about
misstatements in the financial statements.

Risks Associated with Sampling – the auditor may reach an INCORRECT

CONCLUSION (incorrect inference) from testing a sample.
 Sampling Risk – the risk that conclusions from testing a sample may be different
from the conclusion if the entire population were tested. Sample is not a
representative.
Non-Sampling Risk – the risk that the auditor reaches an erroneous conclusion for
any reason not related to sampling risk. Subject to human error (inappropriate
procedure, misinterpretation of evidence, and failure to recognize misstatement /
deviation).
29. Sampling risk/ For Test of Controls
beta risk and
alpha risk Assessment of control risk at low level and if mababa talaga yung control risk ng
buong population, tama yung conclusion. Pero kung mataas talaga yung
control risk ng buong population, then it might produce a risk of assessing control
risk too low, or risk of overreliance, or Beta Risk that can affect the audit
effectiveness that may lead to inappropriate opinion.

Assessment of control risk sa sample ay mataas. Kung mataas talaga s’ya sa buong
population, then tama yung conclusion ni auditor. Pero kung mababa naman pala
yung control risk sa buong population, it will result a risk of assessing control risk
too high, or risk of underreliance, or Alpha risk that can affect the audit efficiency
kasi it leads to additional work kahit hindi naman dapat.

For Test of Details

If the conclusion of the auditor sa sample is not materially misstated. (Risk of

incorrect acceptance or Beta Risk)

If the conclusion of the auditor sa sample is materially misstated.

(Risk of incorrect rejection or Alpha Risk)

**Two types of sampling risk:

1. Risk that affects audit effectiveness and may lead to an inappropriate audit
opinion (“Beta risk” or “Type II error”) – the risk the auditor will conclude that:
a. In the case of a test of control, that control risk is lower than it actually is, or
b. In the case of a substantive test, that a material error does not exist when in fact it does
2. Risk affects audit efficiency as it would usually lead to additional work to
establish that initial conclusions were incorrect (“Alpha risk” or “Type I error”) – the
risk the auditor will conclude that:
a. In the case of a test of control, that control risk is higher than it actually is, or
b. In the case of a substantive test, that a material error exists when in fact it does not
30. Attribute Attribute Sampling – the most common statistical sampling for test of controls. In
sampling determining the sample size, the sample size is developed (Some tables require the
auditor to specify the population size). In evaluating the sample results, the sample
evaluation tables are developed (upper deviation rate shall be compared to
tolerable deviation rate).
Other Statistical Attribute Sampling
Discovery Sampling – designed to detect at least one deviation in the population. It is
designed primarily to search for critical deviations, including fraud. If a deviation is
discovered, the auditor should abandon sampling and examine the population thoroughly.
Sequential (Stop-or-Go) Sampling – the auditor starts by examining a small
sample and decide whether to assess control risk at the planned and higher level,
and testing more samples.

Classical Variables Sampling – a statistical sampling for substantive procedures. In

this sampling, there is a sample size formula, but the auditor may also use the
sample tables. This evaluates the sample results by using the mean-per-unit
estimation, ratio estimation, and difference estimation.
Monetary Unit Sampling – can be called as probability-proportional-to-size
sampling. This is another method of statistical sampling for substantive procedures.
It also uses a sample size formula. It is used kapag systematic sample selection
yung ginagamit.

** Types of statistical sampling:

1. Attribute sampling – sampling in tests of controls

Attribute sampling is a statistical sampling method used to estimate the rate (%) of
occurrence (exception) of a specific characteristic or attribute. Samples taken to
test the operating effectiveness of controls are intended to provide a basis for the
auditor to conclude whether the controls are being applied as prescribed. Attribute
sampling generally deals with yes/no questions. For example, "Are time cards
properly authorized (i.e., to assure recorded hours were worked)?", or "Are
invoices properly voided (e.g., stamped "paid") to prevent duplicate payments?"

Attribute sampling models:

a. Discovery sampling – a special type of attribute sampling appropriate when the
auditor believes the population deviation rate is zero or near zero. It is used when
the auditor is looking for a very critical characteristic or deviations (e.g., fraud). The
auditor predetermines the desired reliability (confidence) level (e.g., 95%) and the
maximum acceptable tolerable rate (e.g., 1%), and a table is then used to
determine sample size. If no deviations are found in the sample, the auditor can be
95% certain that the rate of deviation in the population does not exceed 1%. If
deviations are found, a regular attribute sampling table may be used to estimate
the deviation rate in the population, and audit procedures may need to be
expanded.
b. Stop-or-go sampling (sequential sampling) – is designed to avoid oversampling
for attributes by allowing the auditor to stop an audit test before completing all
steps. It is used when few errors are expected in the population.
Sequential sampling separates the sampling process into several states. After a
step, the auditor determines if it is warranted to accept or increase the preliminary
level of control risk.

Types of sampling:
 Audit sampling is used for both tests of controls (attributes sampling) and for tests
of details of transactions and balances(usually, variables sampling). In both
attributes sampling and variables sampling, the plans may be either nonstatistical
or statistical.
1. Attribute sampling – estimates the quality characteristic of a population; it estimates
the rate of deviation for internal controls that the auditor decides to rely upon
Applicability of attribute sampling: primarily used for test of controls because
attribute sampling deals with estimating deviation from internal control procedures
2. Variables sampling – estimates the numerical quantity of a population
Applicability of variable sampling: typically used in substantive testing of account
balances because variables sampling deal with peso balances
31. Variable 2. Variables sampling – sampling in substantive tests:
sampling a. Probability-proportional-to-size (PPS) sampling – sampling technique where the
sampling unit is defined as an individual peso in a population. Once a peso is
selected, the entire account (containing that peso) is audited.
• It is a sampling plan that automatically stratifies the population.
b. Classical variables sampling – a statistical sampling method used to estimate the
numerical measurement of a population, such as a peso value (e.g., accounts
receivable balance). This sampling method is used primarily in substantive testing.
The objective of variables sampling is to obtain evidence about the reasonableness
of monetary amounts. The auditor estimates the true value of the population by
computing a point estimate of the population and computing a precision interval
around this point estimate. Classical variables sampling measures sampling risk by
using the variation of the underlying characteristic of interest.

Three commonly used classical variables sampling:

1. Mean-per-unit estimation – a sampling plan that uses the average value of the
items in the sample to estimate the true population value (i.e., estimate = average
sample value x number of items in population). MPU does not require the book
value of the population to estimate true population value.
2. Ratio estimation – a sampling plan that uses the ratio of the audited (correct)
values of items to their book values to project the true population value. Ratio
estimation is a highly efficient technique when the calculated audit amounts are
approximately proportional to the client's book amounts.
3. Difference estimation – a sampling plan that uses the average difference
between the audited (correct) values of items and their book values to project the
actual population value. Difference estimation is used instead of ratio estimation
when the differences are not nearly proportional to book values.
10 32. Post audit POST AUDIT RESPONSIBILITIES- Events after the financial whether statements have
responsibilities been issued.

Ordinarily, the auditor does not have any responsibility to perform additional
procedures after the financial statements are issued. However, when the auditor
becomes aware that the audit report issued in connection with the financial
statements may be inappropriate, he must take steps to prevent future reliance on
such report.
Subsequent discovery of facts

The auditor has no obligation to make any inquiry regarding previously issued
financial statements unless he becomes aware of a material fact,

- which existed at the date of the auditor's report; and

- which, if known at that date, may have caused the auditor to modify the report

This is critical because users may be relying on misleading financial statements.

When the auditor becomes aware of this type of information, he should:

1. Discuss the matter with the appropriate level of management and consider
whether the financial statements need revision.
2. Advise management to take the necessary steps to ensure tha the users of the
previously issued financial statements are informed of the situation.
If the management makes the appropriate revisions and disclosures to the users of
the financial statements, the auditor should issue a new audit report that includes
an emphasis of a matter paragraph to highlight the reason for the revision of the
previously issued financial statements.

In the event that management refuses to revise the financial statements or to

inform the users about the newly discovered information, the auditor should notify
those persons ultimately responsible for the direction of the entity about the
management's refusal and about his intent to prevent users from relying on the
audit report.

Subsequent discovery of omitted procedures

Auditors are not required to review the working papers once an audit report is
issued. However, firm's internal inspection program or quality control review may
disclose the omission of auditing procedures considered necessary at the time of
the audit. In this situation, the auditor should follow these guidelines;

1. Assess the importance of the omitted procedures to the auditor's ability

support his opinion.

Results of other audit procedures that were applied may compensate for or make
the omitted procedures less important.
Evaluating such results may involve:

- Reviewing the working papers

- Discussing the circumstances with the engagement personnel
- Reevaluating the scope of the audit.

2. Undertake to apply the omitted procedures or the corresponding alternative

procedures.
 If the auditor determines that the omission of the procedures impairs his current
ability to support his opinion, and the auditor believes that there are persons
currently relying, or likely to rely on the report, the auditor should promptly apply
the omitted procedures or the corresponding alternative procedures

If, after applying the omitted procedures, the auditor determines that the financial
statements are materially misstated and that the auditor's report is inappropriate,
the auditor should discuss the matter with the management and take steps to
prevent future reliance on the report.
10 33. Subsequent Subsequent events are those events or transactions that occur subsequent to the
events balance sheet date that may affect the financial statements and the auditor's
p. 382 report for audit purposes the auditor is only concerned with those events that
occurs subsequent to the balance sheet date but before the date of the auditor's
24 report subsequent events may be classified as

Requiring adjustment those that provide further evidence of conditions that

existed at the balance sheet date such as
- settlement of litigation in excess of the recorded liability - loss on uncollectible
receivables as a result of customers deteriorating financial condition

Requiring disclosure those that are indicative of conditions that are arose
subsequent to the balance sheet date

- issuance of stocks or bonds after the balance sheet date

- loss on inventory due to fire that occurred in the subsequent period
- loss on collectible receivable because of a major casualty suffered by the
customer after the balance sheet date

Financial statements may be affected by certain events that occur after the date of
the financial statements. Many financial reporting frameworks specifically refer to
such events. Such financial reporting frameworks ordinarily identify
two types of events: (a) Those that provide evidence of conditions that existed at
the date of the financial statements; and (b) Those that provide evidence of
conditions that arose after the date of the financial statements. PSA 700 explains
that the date of the auditor’s report informs the reader that the auditor has
considered the effect of events and transactions of which the auditor becomes
aware and that occurred up to that date.

The objectives of the auditor are: (a) To obtain sufficient appropriate audit
evidence about whether events occurring between the date of the financial
statements and the date of the auditor’s report that require adjustment of, or
disclosure in, the financial statements are appropriately reflected in those financial
statements in accordance with the applicable financial reporting framework; and
(b) To respond appropriately to facts that become known to the auditor after the
date of the auditor’s report, that, had they been known to the auditor at that date,
may have caused the auditor to amend the auditor’s report.
p. 130 34. Litigation and Litigation and Claims - The auditor shall design and perform audit procedures in
claims order to identify litigation and claims involving the entity which may give rise to a
risk of material misstatement, including: (a) Inquiry of management and, where
applicable, others within the entity, including in-house legal counsel; (b) Reviewing
minutes of meetings of those charged with governance and correspondence
between the entity and its external legal counsel; and (c) Reviewing legal expense
accounts (Depending on the circumstances, the auditor may judge it appropriate to
examine related source documents, such as invoices for legal expenses, as part of
the auditor’s review of legal expense accounts). Other relevant procedures include,
for example, using information obtained through risk assessment procedures
carried out as part of obtaining an understanding of the entity and its environment
to assist the auditor to become aware of litigation and claims involving the entity.

If the auditor assesses a risk of material misstatement regarding litigation or

claims that have been identified, or when audit procedures performed indicate
that other material litigation or claims may exist, the auditor shall, in addition to
the procedures required by other PSAs, seek direct communication with the
entity’s external legal counsel. The auditor shall do so through a letter of inquiry,
prepared by management and sent by the auditor, requesting the entity’s external
legal counsel to communicate directly with the auditor.

If law, regulation or the respective legal professional body prohibits the entity’s
external legal counsel from communicating directly with the auditor, the auditor
shall perform alternative audit procedures. If it is considered unlikely that the
entity’s external legal counsel will respond appropriately to a letter of general
inquiry, for example, if the professional body to which the external legal counsel
belongs prohibits response to such a letter, the auditor may seek direct
communication through a letter of specific inquiry. For this purpose, a letter of
specific inquiry includes: (a) A list of litigation and claims; (b) Where available,
management’s assessment of the outcome of each of the identified litigation and
claims and its estimate of the financial implications, including costs involved; and
(c) A request that the entity’s external legal counsel confirm the reasonableness of
management’s assessments and provide the auditor with further information if the
list is considered by the entity’s external legal counsel to be incomplete or
incorrect.

In certain circumstances, the auditor also may judge it necessary to meet with
the entity’s external legal counsel to discuss the likely outcome of the litigation or
claims. This may be the case, for example, where: The auditor determines that the
matter is a significant risk.; The matter is complex.; There is disagreement between
management and the entity’s external legal counsel. Ordinarily, such meetings
require management’s permission and are held with a representative of
management in attendance.
If: (a) management refuses to give the auditor permission to communicate or
meet with the entity’s external legal counsel, or the entity’s external legal counsel
refuses to respond appropriately to the letter of inquiry, or is prohibited from
responding;
and (b) the auditor is unable to obtain sufficient appropriate audit evidence by
performing alternative audit procedures, the auditor shall modify the opinion in
the auditor’s report in accordance with PSA705.
Written Representations - The auditor shall request management and,
where appropriate, those charged with governance to provide written
representations that all known actual or possible litigation and claims whose
effects should be considered when preparing the financial statements have been
disclosed to the auditor and accounted for and disclosed in accordance with the
applicable financial reporting framework.

Segment Information - The auditor shall obtain sufficient appropriate audit

evidence regarding the presentation and disclosure of segment information in
accordance with the applicable financial reporting framework by: (a) Obtaining an
understanding of the methods used by management in determining segment
information, and: (i) Evaluating whether such methods are likely to result in
disclosure in accordance with the applicable financial reporting framework; and (ii)
Where appropriate, testing the application of such methods; and (b) Performing
analytical procedures or other audit procedures appropriate in the circumstances.

**

Litigation and claims involving an entity may have a material effect on the financial
statements and thus may be required to be disclosed and/or provided for in the
financial statements.
Audit procedures regarding litigation and claims:

1. Identify existence of any litigation and claims

The auditor should carry out procedures to identify existence of any litigations and
claims involving the entity which may result in a material misstatement of the
financial statements. Such procedures would include the
following:
• Make appropriate inquiries of management including obtaining representations
• Review minutes of those charged with governance and correspondence with the
entity’s legal counsel
• Examine legal expense accounts, and
• Use any information obtained regarding the entity’s business including
information obtained from discussions with any in-house legal department.

2. Communicate directly with the entity’s lawyers.

The auditor should seek direct communication with the entity’s lawyers when
litigation or claims have been identified or when the auditor believes they may
exist. The letter would ordinarily specify the following:
• A list of litigation and claims;
• Management’s assessment of the outcome of the litigation or claim and its
estimate of the financial implications, including costs involved; and
• A request that the entity’s legal counsel confirm the reasonableness of
management’s assessments and provide the auditor with further information if the
 list is considered by the entity’s legal counsel to be incomplete or incorrect. The
letter, which should be prepared by management and sent by the auditor, should
request the lawyer to communicate directly with the auditor. If management
refuses to give the auditor permission to communicate with the entity’s legal
counsel, this would be a scope limitation and should ordinarily lead to a qualified
opinion or a disclaimer of opinion. Where the entity’s legal counsel refuses to
respond in an appropriate manner and the auditor is unable to obtain sufficient
appropriate audit evidence by applying alternative audit procedures, the auditor
would consider whether there is a scope limitation which may lead to a qualified
opinion or a disclaimer of opinion.
35. Procedures to According to PSA 560, "The auditor should perform procedures designed to obtain
identify sufficient appropriate evidence that all events up to the date of the auditor's report
subsequent that may require adjustment of, or disclosure in, the financial statements have
events been identified." These procedures would ordinarily include:

- Inquiring of management about any subsequent events

- Reviewing procedures management has established to identify subsequent
events.
- Reviewing the minutes of board of directors and stockholders' meetings.
- Reading the latest available interim financial statements a well as management
reports such as budgets and forecasts.
- Inquiring of the entity's lawyers concerning litigation, claims, and assessments.

When the auditor becomes aware of subsequent events which materially affect the
financial statements, the auditor should consider whether súch events are properly
accounted for and disclosed in the financial statements.

Subsequent events occurring after the report date but before the financial
statements are issued.

The auditor does not have any responsibility to perform procedures to identify
subsequent events occurring after the date of the auditor's report. During this
period, it is the responsibility of the management to inform the auditor of events
that may affect the financial statements.

If the auditor becomes aware of an event occurring after the date of the report but
before the issuance of the financial statements, the auditor should take the
necessary actions to ascertain whether such event has been properly accounted for
and disclosed in the notes to financial statements.

Failure on the part of the client to make appropriate amendments to the financial
statements, where the auditor believes they need to be amended, will cause the
auditor to issue either qualified or adverse opinion.

In the event that the auditor's report has been released to the entity, the auditor
would notify those persons ultimately responsible for the overall direction of an
entity not to issue the financial statements. If the financial statements are
 subsequently released, the auditor needs to take action to prevent reliance on the
auditor's report. These steps will be discussed in the latter section of this chapter.
36. Written Written Representations - PSA 580 (Revised and Redrafted) discusses the use of
representations written representations. Depending on the nature, materiality and extent of
estimation uncertainty, written representations about accounting estimates
recognized or disclosed in the financial statements may include representations:
• About the appropriateness of the measurement processes, including related
assumptions and models, used by management in determining accounting
estimates in the context of the applicable financial reporting framework, and the
consistency in application of the processes.
• That the assumptions appropriately reflect management’s intent and ability to
carry out specific courses of action on behalf of the entity, where relevant to the
accounting estimates and disclosures.
• That disclosures related to accounting estimates are complete and appropriate
under the applicable financial reporting framework.
• That no subsequent event requires adjustment to the accounting estimates and
disclosures included in the financial statements.
Documentation - The audit documentation shall include: (a) The basis for the
auditor’s conclusions about the reasonableness of accounting estimates and their
disclosure that give rise to significant risks; and (b) Indicators of possible
management bias, if any.
Documentation of indicators of possible management bias identified during the
audit assists the auditor in concluding whether the auditor’s risk assessment and
related responses remain appropriate, and in evaluating whether the financial
statements as a whole are free from material misstatement.
37. Unmodified This is issued when the auditor concludes that based on the audit evidence
auditor’s obtained, that the FS is fairly presented, in all material aspects in accordance with
report/ basic the applicable financial reporting framework.
elements Basic Elements of the Unmodified Report:
1. Title (to emphasize the independence of the auditor and to distinguish the
report from others)
2. Addressee (report should be addressed to those parties for whom the report is
prepared such as shareholders, BOD, third parties)
3. Introductory Paragraph (name of entity, FS audited, title of each FS including
date covered by FS, summary of significant accounting policies and notes)
4. Management’s Responsibility for the FS (describes responsibility for the
preparation and fair presentation of FS and for design, implementation and
maintenance of IC)
5. Auditor’s Responsibility (stating that the responsibility of the auditor is to
express an opinion on the FS, that the audit was
conducted in accordance with PSA, and to give a general description of the audit)
6. Auditor’s Opinion
7. Other Reporting Responsibilities
8. Auditor’s Signature (name of audit firm and the personal name of the auditor)
9. Date of Report (date as of the completion of all essential audit procedures)
10. Auditor’s Address (location in the jurisdiction where the auditor maintains his
office
 38. Emphasis on A paragraph included in the auditor’s report that refers to a matter appropriately
the matter presented or disclosed in the FSs, in the auditor’s judgment, is of such importance
paragraph that it is fundamental to users’ understanding of the FSs. The auditor can include
emphasis of matter paragraph provided the auditor has obtained SAAE that the
matter is not materially misstated in the FSs. The inclusion of this paragraph in the
auditor’s report does not affect the auditor’s opinion.
When the auditor includes an Emphasis of Matter paragraph in the auditor’s
report, the auditor shall:
• Include it immediately after the Opinion paragraph;
• Use the heading “Emphasis of Matter,” or other appropriate heading;
• Include in the paragraph a clear reference to the matter being emphasized and to where
relevant disclosures that fully describe the matter can be found in the FSs; and
• Indicate that the auditor’s opinion is not modified in respect of the matter
emphasized
Other Matter Paragraph
A paragraph included in the auditor’s report that refers to a matter other than
those presented or disclosed in the FSs that,in the auditor’s judgment, is relevant
to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s
report.
The auditor shall include this paragraph immediately after the Opinion paragraph
and any Emphasis of Matter paragraph, or elsewhere in the auditor’s report if the
content of the Other Matter paragraph is relevant to the Other Reporting
Responsibilities section.
p. 28 39. Key audit -Key audit matters are those matters that, in the auditor’s professional judgment,
matters were of most significance in the audit of the financial statements of the current
period.

-PSA 701 requires auditors to communicate key audit matters in the auditor’s report
whenever they audit financial statements of listed entities wherein it is intended to
assist the readers in understanding those matters that were of most significance in
the audit of financial statements of the current period.

-Identifying Key Audit Matters (KAMs):

Step 1: Categorize the matters that were communicated with those charged with
governance.
Step 2: Determine which of these matters required significant auditor’s attention.
Step 3: Which of these matters that required significant attention are the most
significance to the audit of the current period.

-Determination of KAMs (requiring significant auditor’s attention in performing

the audit):

1. Areas identified as significant risks or those that involved significant

auditor judgment;

2. Areas in which the auditor encountered significant difficulty in with

respect to obtaining audit evidence; and

3. Circumstance that required significant modification of the auditor’s

planned approach to the audit.
 -The greater the number of KAMs, the less useful the auditor’s communication of
audit matters will be.

-Communicating KAMs:

 Referenced to the notes in financial statements, it should address:

 Why the matter was considered to be most significant?

 How the matter was addressed in the audit?

 The auditor shall not communicate a matter in the Key Audit Matters
section of the auditor’s report when the auditor would be required to
modify the opinion in accordance with PSA 705 (Revised) as a result of the
matter. Include a reference to the Basis for Qualified (Adverse) Opinion or
the Material Uncertainty Related to Going Concern section(s) in the Key
Audit Matters section.

 If there are no KAMs, it should be communicated with those charged with

governance and state this fact in the auditor’s report.

-Documentation

 The matters that required significant auditor attention as determined and

the rationale for the auditor’s determination as to whether or not each of
these matters is a key audit matter.

 Where applicable, the rationale for the auditor’s determination that there
are no key audit matters to communicate in the auditor’s report or that the
only key audit matters to communicate are those matters addressed in
COMMUNICATION bullet 2.

 Where applicable, the rationale for the auditor’s determination not to

communicate in the auditor’s report a matter determined to be a key audit
matter.

PSA 800 40. Financial REPORTS ON SPECIAL PURPOSE FINANCIAL STATEMENTS

statement
prepared using SPFS are made by entities that are complying with a special financial reporting
special purpose framework designed to meet the needs of specific users (PSA 800). Examples
framework include other comprehensive basis of accounting like cash basis accounting,
financial reporting framework established by SEC, IC, or BSP, and financial reporting
provisions of a contract such as bond indenture, loan agreement or a project grant.
Audit report of SPFS should include an EMPHASIS OF MATTER PARAGRAPH.
41. Reporting on Special purpose financial statements are typically reported in a manner that meets
special purpose the specific needs of their users. Unlike general-purpose financial statements,
financial which follow standardized formats such as those prescribed by accounting
statement standards like Generally Accepted Accounting Principles (GAAP) or International
Financial Reporting Standards (IFRS), special purpose financial statements are
tailored to address the unique requirements of the stakeholders who will be using
them.