PREFINAL QUIZ 3

1. Why do you want to become a Certified Public Accountant?

2. Among the different fields in the accounting profession (i.e. public accounting, private accounting, government accounting and academe), which field do you plan to build your career? Why?

3. What are your suggestions to make the study of Auditing Theory more efficient and effective?

FOCUS NOTES

PSQC 1: Quality Control for Firms that Perform Audits and Reviews of Historical Information, and Other Assurance and Related Services Engagements

• The firm should establish a system of quality control designed to provide it with reasonable assurance that the firm and its personnel comply with the professional standards and regulatory and legal requirements, and that reports issued by the firm or engagement partners are appropriate in the circumstances.

• Elements of a System of Quality Control (IHEAL ME)1. L eadership responsibilities for quality within the firm – the engagement partner should

take responsibility for the overall quality of each audit to which the partner is assigned.2. E thical requirements (PCOPI)

Professional competence and due care Confidentiality Objectivity Professional behavior Integrity

3. A cceptance and continuance of client relationships and specific engagements - before accepting the audit engagement, the auditor should consider the following:

Integrity of the client Its competence to perform the engagement Ability to comply with ethical requirements

4. H uman resources - the firm should have policies ad procedures to address issues concerning:

Recruitment Performance evaluation, compensation and promotion Capabilities and competence Career development Assignment of engagement teams

5. E ngagement performance – the engagement partner should take responsibility for the direction, supervision, review and overall performance of the audit engagement; and the firm should establish policies and procedures that encourage firm personnel to seek assistance from authoritative sources either within or outside the entity (consultation).

6. M onitoring 7. I ndependence*

The nature and extent of a CPA firm’s quality control policies and procedures depend on the:

CPA firm’s size

Nature of the CPA firm’s practice Cost-benefit considerations

PSA 200: OBJECTIVES AND GENERAL PRINCIPLES GOVERNING THE AUDIT OF THE FINANCIAL STATEMENTS

AUDIT – the objective of an audit of the financial statements is to enable the auditor to express an opinion to whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework.

GENERALLY ACCEPTED AUDITING STANDARDS (GAAS) – represent measures of the quality of the auditor’s performance. These standards should be looked at as a minimum standard of performance that the auditors should follow.

General standards (TIP)1. T echnical training and proficiency2. I ndependence3. P rofessional Care

Standards of fieldwork (PIE)1. P lanning2. I nternal Control Consideration3. E vidential matter

Standards of reporting (GIDO)1. G enerally Accepted Accounting Principle2. I nconsistency3. D isclosures4. O pinion

PSA 240: The Auditor’s Responsibility to Consider Fraud in an Audit of Financial Statements; PSA 250: Consideration of Laws and Regulations in Audit of Financial Statements

The fair presentation of the financial statements in accordance with the financial reporting standards is the responsibility of the client’s management. The responsibility

of the auditor is to design the audit to provide reasonable assurance of detecting material misstatements in the financial statements.

Misstatements may emanate from: Error - unintentional misstatements in the FS

1. Mathematical or clerical mistakes in the underlying records and accounting data.

2. An incorrect accounting estimate arising from the oversight or misinterpretation of facts.

3. Mistake in the application of accounting policies. Fraud - intentional act by one or more individuals among management, those

charged with governance, employees or third parties, involving the use of deception to obtain unjust or illegal advantage.

• Types of fraud1. Fraudulent financial reporting - involves intentional

misstatements or omissions of amounts or disclosures in the financial statements to deceive financial statements users. This type of fraud is also commonly referred to as management fraud.

a. Manipulation, falsification or alteration of records or documents

b. Misrepresentation in or intentional omission of the effects of transactions from records or documents

c. Intentional misapplication of accounting policies2. Misappropriation of assets or employee fraud - involves theft

of an entity’s assets committed by the entity’s employees.a. Embezzling receiptsb. Stealing entity’s assetsc. Lapping of accounts receivable

Noncompliance with laws and regulations - refers to acts of omission or commission by the entity being audited, either intentional or unintentional, which are contrary to the prevailing laws and regulations.

It does not include personal misconduct (unrelated to business activities of the entity) by the entity’s management or employees.

PSA 260: COMMUNICATIONS OF AUDIT MATTERS WITH THOSE CHARGED WITH GOVERNANCE The auditor should communicate audit matters of governance interest arising from the

audit of financial statements with those charged with governance of an entity on a timely basis.

Charged with governance: role of persons entrusted with the supervision, control and direction of an entity (ex. Board of Directors)

The auditor is not required to design procedures for the specific purpose of identifying matters of governance interest.

The auditor’s communication with those charged with governance may be made orally or in writing.

PSA 230 AUDIT DOCUMENTATION The auditor should prepare, on a timely basis, audit documentation that provides:

A sufficient and appropriate record of the basis of the auditor’s report; Evidence that the audit was performed in accordance with PSAs and applicable

legal and regulatory requirements.

Audit Documentation – means the record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached (terms such as “working papers” or “work papers” are sometimes used).

Experienced auditor means an individual (whether internal or external to the firm) who has a reasonable understanding of

Audit processes PSAs and applicable legal and reporting requirements The business environment in which the entity operates Auditing and financial reporting issues relevant to the entity’s industry

Audit documentation may be recorded on paper or on electronic or other media and it should be prepared to enable an experienced auditor, having no previous connection with the audit, to understand: the nature, timing and extent of audit procedures; the results of the audit procedures and audit evidence obtained; and significant matters arising during the audit and the conclusions reached thereon.

The auditor should complete the assembly of the final audit file 60 days from the date of the auditor’s report as indicated in PSQC 1.

PSA 540: AUDIT OF ACCOUNTING ESTIMATES Accounting estimate means approximation of the amount of an item in the absence of a

precise means of measurement. Management is responsible for making accounting estimate. The auditor should obtain a sufficient appropriate evidence as to whether an accounting

estimate is reasonable in the circumstances and when required is properly disclose. Approaches in the audit of accounting estimate

Review and test the process used by management. Use an independent estimate for comparison with that by management. Review subsequent events which would confirm the estimate.

PSA 550: RELATED PARTIES Related party – refers to persons or entities that may have dealings with one another in

which one party has the ability to exercise significant influence or control over the other party in making financial and operating decisions.

Management is responsible for the identification and disclosure of related parties and transactions with such parties.

During the course of the audit, the auditor needs to be alert for transactions which appear unusual in the circumstances and may indicate the existence of previously unidentified related party transactions.

Examples of conditions in which related party transactions are likely would include: Transactions which have abnormal logical business reason for their occurrence. Transactions which differ in substance and in form. Transactions which are processed in an unusual manner. High volume of significant transactions with certain customers or suppliers

compared with other unrecorded transactions. Unrecorded transactions such as the receipt or provision of management

services at no charge at all.

PSA 610: CONSIDERING THE WORK OF INTERNAL AUDITOR Internal Auditing - an appraisal activity established within an entity as a service to the

entity. Consider internal auditing activities that are relevant to the audit of FS.

The responsibility for audit opinion and the nature, timing and extent of audit procedures lies solely with the external auditor.

Relationship between internal auditing and external auditing. Certain aspects of internal auditing may be useful in determining the nature,

timing and extent of audit procedures. The external auditor’s responsibility will not be reduced by the use of the

internal auditor’s work. When obtaining an understanding and performing a preliminary assessment of the

internal auditing function, the important criteria are to consider are the internal auditor’s:

Organizational status Scope of function Technical competence Due professional care

PSA 620: USING THE WORK OF AN EXPERT Expert – person or a firm possessing special skill, knowledge and experience in a

particular field other than accounting and auditing. Expert may be:

Contracted by the entity Contracted by the auditor Employed by the entity –the objectivity of the expert may be an issue Employed by the auditor

In assessing the work of an expert, the auditor should consider: Source data used Assumptions and methods used by the expert Results of the expert’s work in the light of the overall knowledge of the

business and the results of other audit procedures. Reference to the work of an expert

When issuing an unmodified auditor’s report, the auditor should not refer to the work of an expert for this might be understood as qualification of the auditor’s report or division of responsibility.

If as a result of an expert’s work, the auditor decides to issue a modified report, in some circumstances it might be appropriate, in explaining the nature of the modification, to refer to or describe the work of an expert (including the identity and the extent of the expert’s involvement).

THE AUDIT PROCESS Accepting an engagement

Consider auditor’ qualification and client’s auditability Perform “preliminary planning activities” (PSA 300: PLANNING AN AUDIT OF FS)

Procedures regarding the continuance of client’s relationship Evaluating compliance with laws and regulations Establishing the terms of the engagement

Considerations whether to accept or reject an engagement Competence of the auditor Independence of the auditor Ability to serve the client properly

The integrity of the prospective client’s managementa. Making inquiries of appropriate parties in the business communityb. Communicating with the predecessor auditor

1. Reasons for the change of auditor2. Disagreements3. Any facts that might have a bearing to the integrity of the

prospective client Engagement letter - to avoid misunderstandings with respect to the engagement and

to document and confirm the auditor’s acceptance of the appointment Objective of the audit of the financial statements Management responsibility for the FS Scope of the audit Forms or any reports or other communication to 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 Responsibility of the client to allow the auditor to allow the auditor to have

unrestricted access to whatever records, documentation and other information requested in connection with the audit

Billing arrangement Expectations of receiving management representation letter Arrangements considering the involvement of others (experts, other auditors,

internal auditors and other client personnel Request for the client to confirm the terms of the engagement

Acceptance of a change of engagement (i.e. from an audit engagement to a review engagement)

Change in circumstances affecting the need for the service Misunderstanding as to the nature of an auditor or related service originally

requested A restriction on the scope of the engagement , whether imposed by client or by

the circumstances(Note that A or B would ordinarily be a reasonable basis for requesting a change in engagement).

In order to avoid confusing the reader if there is a change in engagement, the report would not include reference to:1. The original engagement2. Any procedures that may have been performed in the original engagement,

except where the engagement is changed to undertake agreed-upon procedures.

Audit Planning Involves developing a general audit strategy (overall audit strategy) and a detailed

approach (audit plan) for the expected conduct of the audit. It helps ensure that appropriate attention is devoted to important areas of the audit It helps identify potential problems. It allows the work to be completed expeditiously. It assists in the proper assignment and coordination of work. It helps ensure that the audit is conducted efficiently and effectively.

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

Audit plan includes the nature, timing and extent of audit procedures.

PSA 315: UNDERSTANDING THE ENTITY AND ITS ENVIRONMENT AND ASSESSING THE RISK OF THE MATERIAL MISSTATEMENTS - requires the auditor to obtain sufficient understanding of the entity and its environment, including its internal control.

The auditor shall perform risk assessment procedures to provide a basis for the identification and assessments of the material misstatements at

The financial statement level The assertion level for classes of transactions, account balances and

disclosures. Risk assessment procedures by themselves do not provide sufficient

appropriate audit evidence on which to base the opinion. Risk assessment procedures shall include Inquiries of management and others

within the entity, Analytical procedures, Observation and Inspection. Understanding the entity and its environment

Knowledge of the client’s business and industry Identify and understand the events, transactions and practices that may have a

significant effect on the FS Identify and understand the entity’s objectives and strategies, the related

business risks and the entity's measurement of performance Sources of information in understanding the entity and its environment

Review of prior year’s working papers Tour of client’s facilities Discussion with people within and outside the entity Reading books, periodicals and other publications related to the client’s industry Reading corporate documents and financial reports

Developing an overall audit strategy – the auditor must consider carefully the appropriate levels of materiality and audit risk.

Materiality (PSA 320: AUDIT MATERIALITY) – Information is material if its omission or misstatement could influence the economics decision of users taken on the basis of the FS.

Materiality may be viewed as:1. The largest amount of misstatement that the auditor could tolerate in the

financial statements.2. The smallest aggregate amount that could misstate the FS

In accordance with PSA 320, materiality should be considered:1. In the planning stage, to determine the scope of the audit procedures2. In the completion phase of the audit, to evaluate the effect of the

misstatements. PSA 330: THE AUDITOR’S PROCEDURES IN RESPONSE TO ASSESSED RISKS – The auditor

should design the audit to provide reasonable assurance that the financial statements taken as a whole are free from material misstatements.

AUDIT RISK MODELAudit risk=Inherent risk*Control risk*Detection risk

Audit risk – the risk that the auditor would conclude that the FS are fairly misstated when in fact they are materially misstated.

Inherent risks – the susceptibility of the account balances or classes of transactions to a material misstatement assuming that there were no related internal controls.

Control risk – the risk that material misstatements that could occur in an account balance or classes of transactions will not be prevented, detected and corrected on a timely basis by the entity’s accounting and infernal control systems.

Detection risk – the risk that the auditor’s substantive procedures will not detect a material misstatement

All audit risk components may be assessed in quantitative and qualitative terms.

Important relationships Materiality vs risks – inverse Assessed level of inherent risks and control risks vs acceptable level of detection

risks – inverse Materiality vs planned audit procedures – inverse

CONSIDERATION OF INTERNAL CONTROL• Internal control is designed and implemented to achieve the entity’s objectives with

regard to: Reliability of financial reporting – most important consideration of the auditor Effectiveness and efficiency of operations Compliance with applicable laws and regulations

Obtain an understanding of the internal control (IC) Evaluate the design of controls (Inspection, Inquiry, Observation) Determine whether controls has been implemented (Perform walkthrough)

Documenting the auditor’s understanding of IC Narrative description of the entity’s IC Flowchart IC questionnaire

Perform Tests of Controls (TOC) – to obtain evidence about the design of controls and operating effectiveness of controls (Inquiry, Observation, Inspection, Reperformance)

Operating effectiveness of IC – by whom were the controls applied, how were they applied and the consistency on which they were applied?

When do we perform TOC? To support our assessment of Control Risk (CR) at less than high level and we

intend to rely on those controls. If substantive procedures alone are not sufficient to support our opinion.

Documentation of the assessed level of CR If assessed at high level

1. Understanding of the IC system2. Conclusion that CR is assessed at high level.

If assessed at less than high level1. Understanding of the IC system2. Conclusion that CR is assessed at less than high level.3. Basis for the conclusion (TOC)

Internal Control Components (CRICM) Control environment (IMACPA) – foundation of all other components and sets

the tone of the organization, provides discipline and structure , and influence the control consciousness of employees.1. Integrity and ethical values 2. Management philosophy and operating style3. Active participation of those charged with governance4. Commitment to competence5. Personnel policies and procedures6. Assignment of responsibilities and organizational structure

Risk assessment procedures

Information and communication systems Control activities

1. Authorization2. Performance reviews3. Information processing4. Physical controls5. Segregation of duties

Monitoring1. Ongoing monitoring – are built into the normal recurring activities of an

entity and include regular management and supervisory activities (ex. Preparation of monthly bank reconcilaition, review of the purchase function)

2. Separate evaluation – are performed on a non-routine basis (ex. Functions performed by the internal auditors)

PERFORMANCE OF SUBSTANTIVE PROCEDURES Substantive procedures are performed in order to detect material misstatements at the

assertion level, and include: Tests of details of classes of transactions, account balances and disclosures Substantive analytical procedures

AUDITING IN A CIS ENVIRONMENT Computer Information System (CIS) Environment – exists when a computer of any type

or size is involved in the processing by the entity of financial information of significance to the audit, whether that computer is operated by the entity or by a third party.

CIS environment may affect the ff: The accounting and internal control systems of the entity The auditor’s design and performance of tests of control and substantive

procedures to satisfy the audit objectives The specific procedures to obtain knowledge of the entity’s accounting and

internal control system. Characteristics of a CIS environment

Lack of transaction trails Consistency of performance Ease of access to data and computer programs Concentration of duties Systems generated transactions Vulnerability of data and program storage media

Internal control in a CIS environment General Controls – are those control policies and procedures that relate to the

overall computer information system.1. Organizational controls

a. Segregation of duties between the CIS department and user departments. – All changes in computer files must be initiated and authorized by the users.

b. Segregation of duties within the CIS departments. The function of systems analyst and computer programmer

may be combined in small entities with limite d number of personnel.

The functions of systems development and computer operations must be segregated.

2. System development and documentation controlsa. Software development as well as changes thereof must be approved

by the appropriate level of management and the user department.b. Adequate systems documentation must be made in order to

facilitate the use of the program as well as changes that may be introduced later into the system.

3. Access controls - Every computer system should have adequate security controls to protect equipment, files and programs. (ex. Physical controls, passwords)

4. Data recovery controls - provides for the maintenance of back up files and off-site storage procedures.

a. Grandfather, father, son record retention – requires an entity to keep the two most recent generations of master files and transaction files in order to permit reconstruction of master file if needed.

b. Hot site – a disaster recovery control requiring the entity to establish and maintain an offsite CIS system where the equipments are already installed and recent information and data are readily available to enable the entity to continue processing its information a few hours after the occurrence of a disaster.

c. Cold site – similar to a hot site, however the equipments are not yet installed and would require the entity a few days before resuming its information processing after the occurrence of a disaster.

5. Monitoring controls

Application Controls – to establish specific control procedures over the application systems to provide reasonable assurance that all transactions are authorized, recorded and are processed completely, accurately and on a timely basis.

a. Controls over input – designed to provide reasonable assurance that: Transactions are properly authorized before being processed by

the auditor. Transactions are accurately converted into machine readable

form and recorded in the computer data files. Transactions are not lost, added, duplicated or improperly

changed. Incorrect transactions are rejected and if necessary,

resubmitted on a timely basis.b. Controls over processing

Transactions, including system generated transactions , are properly processed by the computer.

Transactions are not lost, added, duplicated or improperly changed.

Processing errors are identified and corrected on a timely basis.c. Controls over output

Results of processing are accurate. Access to output is restricted to authorized personnel. Output is provided to appropriate authorized personnel on a

timely basis.

Audit approaches in a CIS environment Auditing around the computer (black box approach) – the auditor ignores or

bypasses the computer processing function of an entity’s EDP system, focusing solely on the input documents and the CIS output.

Use of Computer Assisted Audit Techniques (white box approach) – directly auditing the client’s computer program1. Test Data

A set of dummy transactions specifically designed to test the control activities that management claims to have incorporated into the processing programs.

Shifts control over processing to the auditor by using client’s software to processing to the auditor by using client’s software to process auditor-prepared test data that includes both valid and invalid transactions.

Ineffective if the client does not use the program tested.2. Base Case Evaluation (BCSE)

Develops test data that purports to test every possible condition that an auditor expects client software will confront.

Provides an auditor with much more assurance than the test data alone, but expensive to develop and therefore cost-effective only in large systems

3. Integrated Test Facility A variation of test data whereby simulated data and actual data

are run simultaneously with the client’s program and computer results are compared with the auditor’s predetermined results.

It provides assurance that the software tested is actually used to prepare financial reports.

4. Parallel Simulation It involves processing of client’s live (actual) data utilizing an

auditor’s generalized audit software. If an entity’s controls have been operating effectively, the client’s

software should generate the same exceptions as the auditor’s software.

5. Controlled Reprocessing A variation of parallel simulation. It involves processing of actual

client data through a copy of the client’s application program.

COMPLETING THE AUDIT AND POST AUDIT RESPONSIBILITIES Identifying subsequent events that may affect the FS under audit

PSA 560 – “subsequent events” refer to events occurring between the date of the FS and the date of the auditor’s report, and facts that become known to the auditor after the auditor’s report.

Classification of subsequent events1. Requiring adjustments – conditions existed at the Balance Sheet date2. Requiring disclosure – arose subsequent to the Balance Sheet date

PSA 560 – The auditor should perform procedures designed to obtain sufficient appropriate evidence that all events up to the date of the auditor’s report that may require adjustment of, or disclosure in, the financial statements have been identified.

1. Inquiry of management of any subsequent events and of the entity’s lawyers concerning litigations, claims and assessments.

2. Reviewing procedures management has established to identify subsequent events and the minutes of the BOD and stockholders meeting.

3. Reading the latest available FS as well as management reports such as budgets and forecasts.

The auditor does not have responsibility to perform procedures to identify subsequent events occurring after the date of the auditor’s report.

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 FS.

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

Effect on the date of auditor’s report1. If a material subsequent event requiring adjustment to the financial

statements occurs after the date of the auditor’s report but before the issuance of the FS, the financial statement should be adjusted and the auditor’s report should bear the original date.

2. If a material subsequent event requiring disclosure to the financial statements occurs after the date of the auditor’s report but before the issuance of the FS, the auditor should consider the adequacy of disclosures and date the auditor’s report as of the date of the subsequent event.

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 FS. If the FS are subsequently released, the auditor needs to take action to prevent reliance on the auditor’s report.

Identifying contingencies such as litigation, claims and assessment Management (not the client’s lawyers) is the primary source of information

about litigation, claim, and assessment as a basis for the preparation of FS in conformity with PFRS. However, PSA 501 requires the auditor to carry out procedures in order to become aware of any litigation and claims involving the entity which may have material effect on the FS.

When litigations or claims have been identified or when the auditor believes they may exist, the auditor should seek direct communication with the entity's lawyers.

Letters of audit inquiry – a letter prepared by management and sent by the auditor to lawyers, requesting the lawyers to communicate directly to the auditor regarding material litigations and claims of the entity.

Obtaining written management representation Confirm oral representations made by management. Reduce the possibility of misunderstanding. Document management’s acceptance for its responsibility for fair presentation

of the FS. Management representation are part of the evidential matter the auditor

accumulates, but they are not substitute for the performance of audit procedures designed to obtain necessary evidence for expression of an opinion. However, in some circumstances, representation by management may be the only evidence which can reasonably be expected to exist. (ex. Classification of an investment property)

PSA 580 states that the auditor should obtain written representations from management on matters material to the FS when other appropriate audit evidence cannot be reasonably expected to exist.

The representation letter would ordinarily be dated the same as the auditor’s date.

Should be signed by the CEO and CFO If management refuses to provide representation letter that the auditor

considers necessary, this constitutes a scope limitation. Performing wrap-up procedures

Final analytical procedures Identify unusual fluctuations that were not previously identified. Assessing the validity of the conclusions reached and evaluating the overall

financial statement presentation. Evaluation of the entity’s ability to continue as a going concern (PSA 570)

Management is required to make a specific assessment of the entity’s ability to continue as a going concern.

If there is reasonable assurance that the entity is a going concern – unqualified audit report

If there are substantial doubt against an entity’s going concern:1. These factors are adequately disclosed – unqualified audit report with

emphasis of a matter paragraph.2. These factors are not adequately disclosed – qualified or disclaimer of

opinion. If going concern assumption is not appropriate, the FS should be prepared

using the appropriate basis, otherwise, adverse opinion.

Evaluating the audit findings and obtaining client’s approval for the PAJE. If management accepts all PAJEs, issue an unqualified opinion. If management refuses to correct the FS, issue a qualified or an adverse

opinion. Post audit responsibilities – events after the FS are issued

The auditor does not have any responsibility to additional audit procedures after the FS are issued. However, when the auditor becomes aware that the audit report issued in connection with the FS may be inappropriate, he must take steps to prevent future reliance on those reports.

Subsequent discovery after the FS are issued 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 would require the auditor to discuss the matter appropriate level of management and consider whether the FS need revision and advise management to take the necessary steps to ensure that the users of the FS are informed of the situation.

If management makes the appropriate disclosures to the users of the FS, 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 FS.

If management refuses to revise the FS, or to inform the users of the newly discovered information, the auditor should notify those persons of the ultimate direction of the entity about the management’s refusal and about the auditor’s intent of preventing the users from relying on the audit report.

OTHER IMPORTANT CONSIDERATIONS

PSA 505: EXTERNAL CONFIRMATIONS – is the process of obtaining and evaluating audit evidence through a direct communication from a third party in response to a request

Positive external confirmation – asks the respondent to reply to the auditor in all cases either by indicating the respondent’s agreement with the given information, or by asking the respondent to fill in the information.

Negative external confirmation – asks the respondent to reply only in the event of disagreement with the information provided on the request1. The assessed risk of material misstatement is lower2. A large number of small balances is involved3. A substantial number of errors is not expected4. The auditor has no reason to believe that the respondents will ignore the

request. PSA 320:MATERIALITY IN PLANNING AND PERFORMING THE AUDIT

Materiality should be considered by the auditor when:1. Determining the nature, timing and extent of audit procedures.2. Evaluating the effects of misstatements

If the auditor concludes that the aggregate of uncorrected misstatements may be material, the auditor needs to consider:1. Reducing the risk by extending audit procedures2. Requesting management to adjust the financial statements for the

misstatements identified. PSA 520:ANALYTICAL PROCEDURES

An analytical procedure means the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or which deviate from predicted amounts.

Analytical procedures include the consideration of comparisons of the entity’s financial information with, for example:1. Comparable information for prior periods2. Anticipated results of the entity, such as budgets or forecasts, or

expectations of the auditor, such as an estimation of depreciation.3. Similar industry information

Analytical procedures also include relationships:1. Among elements of financial information that would be expected to

conform to a predictable pattern based on the entity’s experience, such as the gross profit rate.

2. Between financial and nonfinancial information, such as payroll costs to the number of hours used.

Analytical procedures can be used:1. In the planning stage, to assist the auditor in understanding the business

and in identifying areas of potential risk.2. As a substantive test.3. In the completion stage of the audit when forming an overall conclusion as

to whether the financial statements as a whole are consistent with the auditor’s knowledge of the business.

Analytical procedures are required in the planning and completion stage of the audit.

PSA 500: AUDIT EVIDENCE

Audit Evidence – is all the information used by the auditor in arriving at the conclusions on which the opinion is based, and includes information contained in the accounting records underlying the FS and other corroborating information.

Accounting records include book of accounts, related accounting manuals, worksheet, supporting cost allocations and reconciliation prepared by the client personnel. Accounting records alone cannot be considered as sufficient appropriate evidence to support an opinion. They must be supported by corroborative information.

Corroborating information supporting the underlying accounting data obtained from the client includes documents such as invoices, contracts, bank statements, purchase orders, checks and other information obtained or developed by auditor through confirmation, recalculation, observation and reconciliation.

The auditor should perform audit procedures to have reasonable assurance that it could support its opinion with sufficient appropriate evidence.

Generalizations can be made about the reliability of audit evidence:1. Audit evidence is more reliable when it is obtained from independent

sources outside the entity.2. Audit evidence that is generated internally is more reliable when the related

controls imposed by the entity are effective.3. Audit evidence obtained directly by the auditor (ex. Observation) is more

reliable than audit evidence obtained by inference (ex. Inquiry).4. Audit evidence is more reliable when it exists in documentary form than an

oral representation.5. Audi t evidence provided by original documents is more reliable than audit

evidence provided by photocopies or facsimiles.

CATEGORIES OF ASSERTION Assertions about classes of transactions and events for the period under audit

(generally assertions regarding income statement accounts) CuClaCOA1. Cu toff2. Cla ssification3. Completeness4. O ccurrence5. A ccuracy

Assertions about account balances at period end (generally assertions regarding balance sheet accounts) VREC1. Valuation and Allocation2. Rights and Obligations3. Existence4. Completeness

Assertions about presentation and disclosure (generally affects the notes to FS)1. Existence2. Rights and Obligations3. Completeness4. Valuation and allocation

Examples of audit procedures Inspection – consists of examining records and documents, whether internal or

external, in paper form, electronic form, or other media. Inspection of tangible assets consists of physical examination of assets.

Observation – consists of looking at a process or a procedure being performed by others

Inquiry – consists of seeking information of knowledgeable persons, both financial and non-financial, throughout the entity or outside the entity

Confirmation – is the process of obtaining a representation of information or of an existing information directly from a third party

Recalculation – consists of checking the mathematical accuracy of documents or records

Reperformance – is the auditor’s independent execution of procedures or controls that were originally performed as part of the entity’s internal control, either manually or through the use of CAATs

Analytical procedures – consist of evaluations of financial information made by a study of plausible relationships among both financial and non-financial data. It also encompasses the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or deviate significantly from predicted amounts.

PSA 501: AUDIT EVIDENCE-ADDITIONAL CONSIDERATIONS ON SPECIFIC ITEMS Attendance at physical inventory count

1. When inventory is material to the FS, the auditor should obtain sufficient appropriate audit evidence regarding its existence and condition by attendance at physical inventory counting unless impracticable.

2. If unable to attend the physical inventory count on the date planned due to unforeseen circumstances, the auditor should take or observe some physical counts on an alternative date, and when necessary, perform tests of intervening transactions.

3. When attendance is impracticable, the auditor should consider whether alternative procedures provide sufficient appropriate audit evidence of existence and condition to conclude that the auditor need not make reference to a scope limitation.

When inventory is under the custody and control of a third party, the auditor would ordinarily obtain direct confirmation from third parties as to the quantities and condition of inventory held on behalf of the entity.