REPUBLIC ACT NO. 9298The Philippine Accountancy Act of 2004

SEC. 1 THE PHILIPPINE ACCOUNTANCY ACT OF 2004

SEC. 2 DECLARATION OF POLICY:The State recognizes the IMPORTANCE OF ACCOUNTANTS in NATION BUILDING and DEVELOPMENT. Hence, it shall develop and nurture competent, virtuous, productive and well-rounded professional accountants whose standards of practice and service shall be excellent, qualitative, world class and globally competitive through inviolable, honest, effective, and credible licensure examinations and through regulatory measures, programs and activities that foster their professional growth and development.

SEC. 3 OBJECTIVES: This Act shall provide for and govern:a. The STANDARDIZATION and REGULATION of accounting education;b. The EXAMINATION for REGISTRATION of CPAs; andc. The SUPERVISION, CONTROL and REGULATION of the PRACTICE OF ACCOUNTANCY in the

Philippines.

SEC. 4 SCOPE OF PRACTICE: shall include but not limited to practice of/in:a. PUBLIC ACCOUNTANCYb. COMMERCE and INDUSTRY

c. EDUCATION and ACADEMEd. GOVERNMENT

SEC. 5 BOARD OF ACCOUNTANCY: is the professional regulatory board for the practice of accountancy under the supervision and administrative control of the PRC, which is composed of:From 5 nominees 3 recommendees 1 Chairman (President)for each position (PICPA) for each position (PRC) 6 members – 1 vice-chairman

SEC. 6 QUALIFICATIONS of members of the BOA: must be- Natural born citizen and resident of the Philippines- CPA with at least ten (10) years of experience- Of good moral character and not have been convicted of crimes involving moral turpitude- Not have any pecuniary interest in any entity conferring academic degree necessary for admission to

practice of accountancy

SEC. 7 TERM OF OFFICE of members of BOA:Chairman and members- no person shall serve more than two (2) successive terms but is eligible for re-appointment after lapse of one (1) year; Term is equal to three (3) years.

- Vacancy shall be filled for remaining term onlyVice-chairman - term of one (1) year

SEC. 8 COMPENSATION AND ALLOWANCE of the Board: provided for in General Appropriations Act (GPA)

SEC. 9 POWERS AND FUNCTIONS of the Board:- To PRESCRIBE and adopt RULES AND REGULATIONS necessary to carry out this Act.- To SUPERVISE the registration, licensure and PRACTICE OF ACCOUNTANCY in the Philippines- To ADMINISTER OATH- To ISSUE, SUSPEND, REVOKE OR REINSTATE the CERTIFICATE OF REGISTRATION for the practice of

the profession- To ADOPT OFFICIAL SEAL of the BOA- To prescribe and ADOPT CODE OF ETHICS- To MONITOR CONDITIONS AFFECTING THE PRACTICE of accountancy- To conduct or OVERSIGHT with the QUALITY OF AUDITS of FS- To INVESTIGATE VIOLATIONS of this Act- To make such INVESTIGATIONS as it deems necessary- To ISSUE a CEASE AND DESIST ORDER to any person, association or partnership engaged in violation

of this Act- To PUNISH FOR CONTEMPT of the Board, in accordance with the Rules of Court- To PREPARE, ADOPT, ISSUE OR AMEND the SYLLABI of the subjects for examination in consultation

with the academe

- To ENSURE, in coordination with CHED- To EXERCISE such OTHER POWERS provided by law

The policies, resolutions, rules and regulations issued by the Board should be subject for review and approval of the Commission. However, the Board’s decision, resolutions or orders rendered in administrative cases shall be subject for review only if on appeal. SEC. 10 ADMINISTRATIVE SUPERVISION OF THE BOARD, CUSTODIAN of its RECORDS, SECRETARIAT and SUPPORT SERVICES: PRC

SEC. 11 GROUNDS FOR SUSPENSION OR REMOVAL OF MEMBERS OF THE BOARD:- NEGLECT OF DUTY/INCOMPETENCE- VIOLATION/TOLERANCE of VIOLATIONS OF THIS ACT/CPA’s CODE OF ETHICS and technical and

professional standards.- FINAL JUDGEMENT of crimes involving MORAL TURPITUDE- MANIPULATION or rigging of the CPA LICENSURE EXAMINATIONS

Only the President can remove any member of the Board, per recommendation of the Commission.

SEC. 12 ANNUAL REPORT shall be submitted to the President at close of each calendar year.

SEC. 13 THE CPA LICENSURE EXAMINATIONS

SEC. 14 QUALIFICATIONS OF APPLICANTS FOR EXAMINATIONS:- Filipino Citizen- Of good moral character- Holder of a degree in BS-Accountancy- Not been convicted of any criminal offense involving moral turpitude

SEC. 15 SCOPE OF EXAMINATIONS:Theory of AccountsPractical Accounting IPractical Accounting IIAuditing Theory

Auditing ProblemsBusiness Law and TaxationManagement Advisory Services

The Board subject to the approval of the Commission, may revise or exclude any subject and their syllabi, and add new ones as the need arises.

SEC. 16 RATING IN THE LICENSURE EXAMINATIONS:GWA of 75% WITH NO GRADE BELOW 65% - Passing GWA of 75% with a grade below 65% - Conditional and to take the remaining subject within two (2) years from the preceding examination.

SEC. 17 REPORT OF RATINGS shall be submitted by the Board within ten (10) calendar days after examination, unless extended for a just cause.

SEC. 18 FAILING CANDIDATES TO TAKE REFRESHER COURSE: After failing two (2) CPA Licensure Examinations, a candidate must complete at least twenty four (24) units of the subject given in CPA Licensure Examinations.Conditional Passers - counted as one (1) examination taken.

SEC. 19 OATH shall be taken before any member of the BOA, government official authorized by the Commission or any other person authorized by law, prior to entering the practice of the profession.

SEC. 20 ISSUANCE OF THE CERTIFICATES OF REGISTRATION and PROFESSIONAL IDENTIFICATION CARDS: subject to payment of fees prescribed by the Commission.

CERTIFICATE OF REGISTRATION shall bear the signature of Chairperson of the Commission and the Chairman and members of the Board, indicating the person entitles to practice with all privileges appurtenant thereto. It shall remain in full force and effect until withdrawn, suspended or revoked.

PROFESSIONAL IDENTIFICATION CARD bearing the Registration Number, Date of Issuance, Expiry Date, signed by the Chairperson of the Commission renewable every three (3) years.

SEC. 21 ROSTER OF CPAs: shall be prepared and updated by the Board, and made available to any party deemed necessary.

SEC. 22 INDICATION OF CERTIFICATE OF REGISTRATION, IDENTIFICATION CARD and PROFESSIONAL TAX RECEIPT when a CPA signs a document.

SEC. 23 REFUSAL TO ISSUE CERTIFCATE OF REGISTRATION and PROFESSIONAL IDENTIFICATION CARD:When the examinee has been: - Convicted of crimes involving moral turpitude;

- Guilty of immoral and dishonorable conduct; or- Of unsound mind

SEC. 24 SUSPENSION AND REVOCATION OF CERTIFCATE OF REGISTRATION and PROFESSIONAL IDENTIFICATION CARD and CANCELLATION OF SPECIAL PERMIT:

Grounds for the same shall be:- Unprofessional/Unethical conduct- Malpractice- Violation of any of the provisions of this Act, its Implementing Rules and Regulations, the CPA

Code of Ethics; and the Technical and Professional Standards.

SEC. 25 RE-INSTATEMENT, RE-ISSUANCE and REPLACEMENT of REVOKED or LOST CERTIFICATES:Revoked License - Upon application for reasons deemed proper, the Board after two (2) years may reinstate the validity of a revoked certificate.Lost/Destroyed/Mutilated Certificate or License – new Certificate may be issued upon payment of fees.

SEC. 26 PROHIBITON IN THE PRACTICE OF ACCOUNTANCY:No person shall practice accountancy in this country, or use the title CPA, unless the person shall

receive from the Board and Commission a CERTIFICATE OF REGISTRATION/LICENSE and be issued a professional ID or a valid temporary permit/special permit.

SEC. 27 VESTED RIGHTS: CPAs registered when this Law is passed shall have the same force and effect, if such persons, are in good standing.

SEC. 28 LIMITATION OF THE PRACTICE OF PUBLIC ACCOUNTANCY: CERTIFICATE OF ACCREDITATION - shall only be given to CPAs acquiring three (3) years of

meaningful experience in any areas of the profession, including taxation. NO CORPORATION for organized practice of public accountancy.

SEC. 29 OWNERSHIP OF WORKING PAPERS shall be treated confidential and privileged and remain the property of the CPA, unless there is:

- A written agreement to the contrary; or- Required by any court, tribunal, government regulatory or administrative body.

SEC. 30 ACCREDITED PROFESSIONAL ORGANIZATION shall be registered with the SEC as Nonprofit Organization. Membership is not a bar for membership in other organizations.

SEC. 31 ACCREDITATION TO PRACTICE PUBLIC ACCOUNTANCY shall be renewed every three (3) years.

QUALITY REVIEW COMMITTEE conducts oversight into the quality of audit of FS thru review of Quality Control measures of CPAs.

All senior practitioners of Public Accountancy APO Commission BOA 1APO: Public Practice 2 Academe 1 Commerce 1 Government 1

FUNCTIONS:- Conduct Quality Review on applicants for registration to practice public accountancy and render

a report which shall be attached to the application for registration.- Recommend to the Board revocation of Certificates of Registration and Professional

Identification Card.

SEC. 32 CONTINUING PROFESSIONAL EDUCATION (CPE)CPE Credit Units should have a:

- Minimum of sixty (60) units every three (3) years.- Minimum of fifteen (15) units per year.

Exemption:- Permanent – CPA is sixty five (65) years old and above- Temporary - at least two (2) years abroad prior to date of renewal

OBJECTIVE:- To provide and ensure continuous advancement- Too raise and maintain professional’s capability for delivering professional services- To attain and maintain the highest standards and quality in the practice of the profession- To make the profession globally competitive- To promote the general welfare of the public

CPE CouncilFrom members of the Board and appointed by the Commission - Chairperson terms are

-2 members co-terminus May not vote and position must not be lower than Division Chief - Secretary

SEC. 33 SEAL AND USE OF SEAL: All licensed CPAs shall obtain and use a seal of design prescribed by the BOA bearing the: Registrant’s Name, Registration Number, and Title

Auditor’s Report shall be stamped with said seal indicating:a. Professional Tax Receipt Numberb. Date and Place of payment

SEC. 34 FOREIGN RECIPROCITY

SEC. 35 COVERAGE OF TEMPORARY/SPECIAL PERMITS:Temporary/Special Permits may be issued by the Board subject to the approval of the

Commission and payment of required fees:a. Foreign CPA called for CONSULTATION/SPECIFIC PURPOSE which in judgment of the Board, essential

for the development of the country. Provided, there is no Filipino CPA qualified for such consultation or specific purpose.

b. Foreign CPA engaged as PROFESSOR, LECTURER, CRITIC in fields essential to accountancy education and engagement is confined to teaching only.

c. Foreign CPA who is internationally recognized EXPERT or with specialization in any branch of accountancy essential for advancement of accountancy.

SEC. 36 PENAL PROVISION: Fine of not less than P50, 000.00 or by imprisonment for a period not exceeding two years, or both.

SEC. 37 IMPLEMENTING RULES AND REGULATIONS

SEC. 39 ENFORCEMENT OF THE ACT: Board and Commission - has primary duty Law Enforcement Agencies, LGUs, other political subdivisions - upon call/request of the Board

or Commission Secretary of Justice or any duly designated representative - render legal assistance Any person may bring before the Commission/Board or aforementioned officers, cases or illegal

practice or violation of this Act.

SEC. 40 FUNDING PROVISION: General Appropriations Act (GPA)

SEC. 41 TRANSITORY PROVISION- Incumbent chairman and members of the Board shall continue to serve under the terms for which

they have been appointed under Presidential Decree No. 692- All graduates of Bachelor’s degree-major in Accounting shall be allowed to take the CPA Licensure

Examination within two (2) years upon effectivity of this Act.

PHILIPPINE STANDARDS SETTING COUNCIL

ACCOUNTING and AUDITING STANDARDS SETTING COUNCIL: FINANCIAL REPORTING STANDARDS COUNCIL/FRSC - accounting standards setting council AUDITING and ASSURANCE STANDARDS COUNCIL/AASC - auditing standards setting council

ChairmanBOASECBSPBIR

FRSC COA AASC(15) APO’s: 2 Public Practice 6 (15)

2 Commerce and Industry 12 Academe/Education 12 Government 1

FINEX/Other Org. of Major Users of FSOther Org. of CPAs in Public Practice

APO’s BOA PRC

EDUCATION TECHNICAL COUNCIL:Functions:a. Determine minimum standard curriculumb. Establish teaching standardsc. Monitor the progress of the program in the study of accountancyd. Evaluate periodically the performance of educational institutions

ChairmanAPO’s: Organization of CPAs 1

Public Practice 1Commerce and Industry 1Government 1Academe and Education (Public/Private) 2

AUDITING AN OVERVIEW

PAS 200 defines Auditing by stating the objective of a financial statement audit, that is, to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework.

PRIMARY FUNCTION is to lend credibility to the FS prepared by the Client management.

“An audit is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.” AAA

The definition conveys that:a. Auditing is SYSTEMATIC PROCESS.b. Audit involves obtaining and evaluating evidence about ASSERTIONS regarding economic actions

and events.ASSERTIONS are representations made by an auditee.

c. Audit is CONDUCTED OBJECTIVELY. (without bias; impartial attitude)d. Auditors ascertain the degree of correspondence between ASSERTIONS and ESTABLISHED CRITERIA.

(conformity)ESTABLISHED CRITERIA is needed to judge the validity of the assertions: Assertion is the fairness of the FS Criteria is the Financial Reporting Framework/GAAP

e. Auditors communicate the results to various interested users.Communication of AUDIT FINDINGS ON A TIMELY BASIS is the ultimate objective of an Audit.

Although great majority of audit work today deals with audit of financial statements, Operational and Compliance Auditing are becoming more and more important. All audits possess the same general characteristics that they are:a. Systematic examination and evaluation of evidence to ascertain whether assertions comply with the

established criteria; and b. Communication of results of examination.

TYPES OF AUDIT:FINANCIAL AUDIT COMPLIANCE AUDIT OPERATIONAL AUDIT

ASSERTIONS FS are fairly presented Organization complied with Laws, Regulations or Contracts

Organization’s activities are conducted efficiently and effectively

ESTABLISHED CRITERIA Financial Reporting Framework; GAAP

Laws, Regulations or Contracts

Objectives set by the BOD

AUDITOR’S REPORT Opinion Degree of Compliance Recommendations and Suggestions

AUDITOR External Auditor Government Auditor; BIR Examiners; COA

Internal Auditor

Elements of THEORETICAL FRAMEWORK: (POSTULATES)a. Audit function operates on the assumption that ALL FINANCIAL DATA ARE VERIFIABLE

- All balances must have supporting documents or evidence to prove their validity.b. Auditor should always maintain INDEPENDENCE with respect to Financial Statements under Audit

- essential in ensuring credibilityc. There should be NO LONG-TERM CONFLICT between the auditor and the client management.d. EFFECTIVE ACCOUNTING and INTERNAL CONTROL SYSTEMS reduces possibility of errors and fraud

affecting the FS- The condition of accounting and internal control system directly affects the reliability of the FS.

e. CONSISTENT APPLICATION of Generally Accepted Accounting Principles (GAAP) or Financial Reporting Standards results in fair presentation of the FS

f. What was held true in the past will continue to hold true in the future in the absence of known conditions to the contrary - Experience and knowledge

g. Audit BENEFITS THE PUBLIC – meet the common needs of a wide range of users.

PROFESSIONAL STANDARDS

Auditors opinion must be based on an examination conducted in accordance with the Professional Standards (GAAS).

GENERALLY ACCEPTED AUDITING STANDARDSA. General Standards

1. The examination is to be performed by a person or persons having ADEQUATE TECHNICAL TRAINING and PROFICIENCY as an Auditor.

2. In all matters relating to an engagement, an INDEPENDENCE IN MENTAL ATTITUDE is to be maintained by the Auditor.

3. DUE PROFESSIONAL CARE is to be exercised in the performance of the audit and in the preparation of the report.

B. Standards of Fieldwork4. The work is to be ADEQUATELY PLANNED and assistants, if any, are to be properly supervised.5. There is to be a PROPER STUDY and EVALUATION of the EXISTING INTERNAL CONTROL as a basis

for reliance thereon and for the determination of the resultant extent of the tests to which auditing procedures are to be restricted.

6. SUFFICIENT COMPETENT EVIDENTIAL MATTER is to be obtained through inspection, observation, inquiries and conformations to afford a reasonable basis for an opinion regarding the financial statements under examination.

C. Standards of Reporting7. The report shall state whether the financial statements are presented in ACCORDANCE with

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP).8. The report shall IDENTIFY those CIRCUMSTANCES in which the PRINCIPLES have NOT BEEN

CONSISTENTLY OBSERVED in the current period in relation to the preceding period.9. INFORMATIVE DISCLOSURES are to be regarded as reasonably adequate unless otherwise stated

in the report.10. The report shall contain an EXPRESSION OF OPINION regarding the financial statements, taken

as a whole, or an assertion to the effect that an opinion cannot be expresses therefore should be stated. In all cases, where an auditor’s name is associated with the financial statements, the report should contain a clear-cut indication of the character of the auditor’s examination if any and the degree of responsibility he is taking.

GAAP – Financial Reporting Framework; issuances by the IFRSC/FRSC/IASC.GAAS - minimum standard the auditor must followPSA - Philippine Standards on Auditing are auditing standards, practices and procedures issued by

the then Auditing Standards and Practices Council (ASPC), and now the Auditing and Assurance Standards Council.

PAPS - Philippine Auditing Practices Statements provide practical assistance to auditor in implementing PSA’s to promote good practice in the field of auditing.

THE AUDIT PROCESS- is the sequence of different activities involved in an audit; may vary depending upon a particular

audit.1. Accepting an Engagement - require evaluation of auditor’s qualification, as well as, auditability of

prospective client’s FS. - Preliminary understanding of client’s business and background investigation of prospective

client. 2. Audit Planning - auditor obtains more detailed knowledge about the client’s business

and industry in order to understand the transactions and events affecting the FS, and to identify potential problems.

3. Considering the Internal Control – the stronger the Internal Control, the more assurance it provides about the reliability of accounting data and financial statements.- Obtaining understanding of entity’s internal control systems and assessing the level of control

risk.4. Performing Substantive Tests - extent of Substantive Test is highly dependent on the results of

auditor’s consideration on internal controls.

5. Completing the Audit - auditor must have sufficient appropriate evidence in order to reach a conclusion on the fairness of the FS.- Performs additional audit procedures, such as:

a. Review of subsequent events and contingenciesb. Assessing the going concern assumptionc. Performing overall analytical review procedured. Obtaining written representations

6. Issuing a Report - auditor forms a conclusion

TYPES OF OPINION:UNQUALIFIED - issued when FS are fairly stated.QUALIFIED - effects of any disagreement with the management, or limitation on scope is not so material.DISCLAIMER - issued when the possible effect of a limitation on scope is so material and pervasive that auditor has not been able to contain sufficient appropriate evidence and cannot express an opinion.ADVERSE - states that FS are not fairly presented in accordance with the financial reporting framework/GAAP.

AUDIT OF FINANCIAL STATEMENTS

OBJECTIVE: To enable the auditor to EXPRESS AN OPINION whether the Financial Statements are prepared in all material respects, in accordance with applicable financial reporting framework.

SCOPE OF THE AUDIT refers to the audit procedures deemed necessary in the circumstances to achieve the objective of the audit.

The procedures required to conduct an audit in accordance with the PSAs should be determined by the AUDITOR having regard to the requirements of PSAs, relevant professional bodies, legislation, regulations and, where appropriate, the terms of the audit engagement and reporting requirements.

Conditions that Create a Demand for Auditing:1. Conflict of Interest2. Expertise3. Remoteness of Information4. Financial Consequences

General Principles Governing an Audit of Financial Statements: (PSA 200)1. Code of Professional Ethics2. PSA Compliance3. Professional Skepticism

Assurance Provided by the Auditor: An audit in accordance with PSAs is designed to provide REASONABLE ASSURANCE that the financial

statements taken as a whole are free from material misstatement. The OPINION IS NOT AN ASSURANCE as to the future viability of the entity nor the efficiency or

effectiveness with which management has conducted the affairs of the entity.

Inherent Limitations of the Audit that affects the Auditor’s ability to detect misstatements:1. Use of Testing2. Human Error3. Nature of Evidence – “Persuasive not Conclusive.”4. Reliance on Management Representation5. Internal Control Limitation

PRE-PLANNING PHASE

INTRODUCTION: An evaluation of prospective clients and a review, on an ongoing basis, of existing clients is to be conducted in order to minimize the likelihood of association with a client whose management lacks integrity.

Preliminary Planning Activities include:1. Background investigation of prospective client or evaluate continuance of relationship with an

existing client.2. Evaluate Auditor’s ability to meet ethical requirements.3. Establish terms of engagement.

New Client Investigation Procedures:1. Financial Information – obtain and review available financial information.2. Third parties – inquire about the reputation of the prospective client from third parties.3. Predecessor auditor – obtain client permission to communicate with the predecessor auditor and

inquire about:a. Reason for change of auditors.b. Any disagreement between predecessor auditor and prospective client.c. Information about the integrity of prospective client.

The auditor and the client should agree on the terms of the engagement. The agreed terms would need to be recorded in an ENGAGEMENT LETTER or other suitable form of contract.

Importance of the Engagement Letter: To help in avoiding MISUNDERSTANDING with respect to the engagement. To CONFIRM and DOCUMENT the auditor’s acceptance of the appointment, the objective and scope

of the audit, the extent of the auditor’s responsibilities to the client and the form of any reports.

Principal Contents of the Engagement Letter:1. Objective2. Management responsibility3. Scope of the Audit4. Limitations of the Audit5. Forms of Report6. Unlimited access to records

RECURRING AUDITS: The auditor does not normally send new engagement letter every year. However, the following conditions may cause the auditor to send a new engagement letter:1. Indication that the Management misunderstands the objective and scope of the audit.2. Change in original arrangements.3. Change in management, BOD, or ownership.4. Significant change in the nature and size of the business.5. Legal requirements.

AUDIT OF COMPONENTS: The principal auditor may or may not send a separate engagement letter to the component. Factors that influence the decision whether to send separate engagement letter to the component include:1. Who appoints the auditor of the component.2. The extent of work of the other auditor.3. Whether a separate audit report will be issued.4. Degree of ownership.5. Legal requirements.

CHANGE IN ENGAGEMENT: An auditor who is engaged to perform an audit of financial statements may sometimes be requested by the client to change the nature of engagement to one which provides a lower level of assurance. Before the auditor honor’s the client’s request, the auditor should consider the appropriateness of doing so. Factors to be considered before accepting a change in engagement include:1. Reason by the client2. Legal and contractual implications

Reasonable justifications for a change in engagement: Change in circumstances affecting the need for the service Misunderstanding as to the nature of an audit or related service originally requested

Unacceptable reason for changing the nature of the engagement: Restriction on the scope of the auditor’s examination Change that related to information that is incorrect, incomplete or otherwise unsatisfactory

PLANNING THE AUDIT

AUDIT PLANNING involves developing a general strategy and a detailed approach for the expected scope of the audit.

IMPORTANCE OF PLANNING THE AUDIT: Helps ensure that appropriate attention is devoted to important areas of the audit Helps identify potential problems Allows the work to be completed expeditiously Assists in proper assignment and coordination of work Helps ensure that the audit is conducted effectively and efficiently

SCOPE: The extent of planning will vary according to the size of the entity, the complexity of the audit and the auditor’s experience with the entity and knowledge of the business.

AUDIT PLANNING STEPS:1. Obtaining understanding of the entity and its environment consists of understanding the

following aspect:a. Entity’s Industryb. Operationsc. Objectives/Strategy/Business Risksd. Measurement of Performancee. Internal Control System

CONTINUING NATURE:Obtaining the required knowledge of the business is a continuous and cumulative process of gathering and assessing the information and relating the resulting knowledge to audit evidence and information at all stages of the audit.

CONTINUING ENGAGEMENT:For continuing engagements, the auditor would update and reevaluate information gathered previously, including information in the prior year’s working papers. The auditor would also perform procedures designed to identify significant changes that have taken place since the last audit.

2. Make a preliminary judgment about materiality levels (financial statement and account balance level)

IMPORTANCE: The auditor should make a preliminary estimate of materiality because there is an INVERSE relationship between the amount the auditor considers to be material and the audit work necessary to attest to the fairness of the financial statements.

STEPS IN APPLYING MATERIALITYa. Set materiality at the FS level.b. Allocate materiality to the account balances. The allocated materiality to any given account is called

the TOLERABLE ERROR for the account.c. Compare the uncorrected likely misstatements with the overall materiality. This is done in the

COMPLETION PHASE of the audit.

Since planning is usually done before year-end, annual financial statements are not yet ready. In this case, the auditor may use the following financial statements as a basis for computing materiality levels: Prior Year’s FS; Budgeted FS; Annualized Interim Income Statement

3. Establish overall audit risk, and assess inherent riskIMPORTANCE: The auditor should establish audit risk and assess its components to determine the nature, timing and extent of substantive tests.

AUDIT Risk - the risk that the auditor may unknowingly fail to appropriately modify the opinion on materially misleading financial statements.

AUDIT Risk Model: Audit Risk and its components may be expressed in an equation:

AR = IR*CR*DR or DR = AR IR*CR

From the above equation, it is safe to conclude that DR is directly related to AR and inversely related to CR and IR.Three Components of AUDIT Risk: INHERENT Risk - Uncontrollable; the susceptibility of an assertion to material misstatements,

assuming no related internal controls. CONTROL Risk - Uncontrollable; the risk that could occur will not be prevented or detected by

the entity’s internal controls. DETECTION Risk - Controllable; the risk that the auditor will not detect misstatements in the

financial statements.

STEPS IN USING THE AUDIT RISK MODEL:a. Set the planned level of Audit Risk.b. Assess the level of Inherent and Control Risk.c. Determine the acceptable level of Detection Risk.d. Design the nature, timing and extent of the substantive test.

Of the three components of audit risks, only DETECTION RISK can be controlled by the auditor by modifying the nature, timing and extent of SUBSTANTIVE TEST. Since INHERENT RISK and CONTROL RISK are functions of management and its environment, auditor can only assess their levels.

RISK ASSESSMENT PROCEDURES include:1. Inquiry2. Observation3. Inspection4. Analytical Procedures

4. Conduct preliminary analytical proceduresIMPORTANCE: Analytical Procedures in the planning stage of the audit assist the auditor in:

a. Identify areas representing specific risks.b. Enhance understanding of client’s business

5. Identify related parties and determine the need to rely on the work of others (expert, internal auditors and other auditors)

6. Document the planning processa. OVERALL AUDIT PLAN is an overview of the engagement, outlining the nature and

characteristics of the client’s business operations and overall strategy.b. AUDIT PROGRAM is a detailed list of the procedures to be performed in the course of the audit.

ADDITIONAL CONSIDERATION ON INITIAL ENGAGEMENT: On initial engagements, additional evidence about the opening balances must be obtained. Accordingly PSA 510 requires the auditor to obtain sufficient appropriate evidence that:

a. Prior years closing balance have been correctly brought forwardb. Opening balances do not contain material misstatementsc. Accounting Principles used is consistent with the preceding year.

INTERNAL CONTROLNATURE OF INTERNAL CONTROL

DEFINITION OF INTERNAL CONTROL STRUCTURE:Policies and procedures established to provide reasonable assurance of achieving the following objectives: Operational; Compliance; and Financial Reporting

MANAGEMENT RESPONSIBILITY:The management is responsible for installing and maintaining adequate internal control structure.

REASONABLE ASSURANCE CONCEPT: This concept recognizes that the cost of internal control should not exceed the benefit expected to be derived.

INHERENT LIMITATIONS of Internal Control:1. Management Override2. Collusion among Employees3. Unusual Transactions

4. Changing Conditions5. Human Error6. Cost-Benefit Consideration

COMPONENTS of Entity’s Internal Control Structure:1. Control Activities2. Risk Assessment Procedures3. Information and Communication Systems

4. Monitoring5. Control Environment

CONTROL ENVIRONMENT - sets the tone of an organization.- foundation for other elements of internal control- reflects the overall attitude, awareness and actions of directors and

management regarding the importance of internal control.FACTORS INFLUENCING this include:a. Commitment to competenceb. Human resources policies/proceduresc. Assignment of responsibilityd. Management philosophy and operating stylee. Participation of the BOD/Audit Committeef. Integrity/Ethical Valuesg. Organizational structure

CONTROL ACTIVITIES - policies and procedures that help ensure that management directives are carried out. Policies and procedures that maybe relevant to the audit include:

a. Performance reviewb. Information processingc. Physical controld. Segregation of duties

ACCOUNTING SYSTEM - information system relevant to financial reporting objectives.- It consists of the methods and records established to identify,

assemble, analyze, classify, record, and report an entity’s transactions and to maintain accountability for the related assets and liabilities.

CLASSIFICATION OFCONTROL PROCEDURES IN AN EDP ENVIRONMENT:A. GENERAL CONTROLS are controls that apply to overall EDP operations.

a. Organizationalb. Systems Developmentc. Access Controlsd. Hardwaree. Data and other procedural

B. APPLICATION CONTROLS are controls that relate to specific use of the system.a. Inputb. Processing Controls

c. Output

CONSIDERATION OF INTERNAL CONTROL

PRIMARY OBJECTIVES:1. To plan the audit2. To determine the nature, timing, and extent of procedures to be performed

SECONDARY OBJECTIVE:1. To provide use for constructive suggestions

STEPS WHEN CONSIDERING INTERNAL CONTROL:1. Obtain and document the understanding of the Internal Control. Understanding the internal

control involves obtaining knowledge about the system’s DESIGN and IMPLEMENTATION but not on its OPERATING EFFECTIVENESS.a. Reading procedures manual and making inquiries of employees help the auditor to obtain

knowledge about the DESIGN of the system while WALKTHROUGH TEST are performed to obtain knowledge about the implementation of the control.

b. After obtaining sufficient understanding of the control, the auditor should document such understanding. Commonly used forms of documentation include:- I.C. Questionnaire- Narrative- Flowchart

2. Make a preliminary assessment of control risk

MAXIMUM LEVEL = NO RELIANCE on Internal Control No tests of controls will be performed but extensive substantive tests.

REASONS: - Controls appear inadequate.- Controls do not pertain to assertions.- Insufficient to perform test of controls.

REQUIRED DOCUMENTATION:- Understanding of Internal Control.- Conclusion that Control Risk is at a maximum level.

BELOW THE MAXIMUM LEVEL = RELIANCE on Internal Control; Auditor wants to rely on the Internal Control

Identify specific internal control policies or procedures that are likely to detect or prevent material misstatements.

Perform test of controls to determine the effectiveness of the design and operation of the internal control policies and procedures

REASONS: - Efficient to perform test of controls

REQUIRED DOCUMENTATION:- Understanding- Conclusion- Basis for the conclusion

APPROACHES IN COMPUTER AUDITA. BLACKBOX Approach is a term used to describe the approach of manually testing transaction data

by focusing on the input documents and detailed output; Auditing AROUND the Computer.

B. COMPUTER ASSISTED AUDITING TECHNIQUEs (CAATs) is a term used to describe the approach of testing the client’s application program; Auditing THRU the Computer.a. TEST DATA involves entering fictitious data through the client’s computer system and comparing

results obtained with predetermined results.

b. INTEGRATED TEST FACILITY involves processing test transactions simultaneously with actual transactions.

c. PARALLEL SIMULATION involves creating a program to process or access client’s data recorded in a machine language.

d. SNAPSHOTS involve taking a picture of a transaction as it flows through the computer system.

e. SYSTEMS CONTROL AUDIT REVIEW FILES (SCARF) involves embedding audit software modules within an application system to provide continuous monitoring of the system’s transactions.

3. Design Substantive Tests – Based on the assessed level of control risk (combines with the assessed level of inherent risk); the auditor will determine the acceptable level of detection risk. Accordingly, the auditor will determine the nature, timing, and extent of his substantive tests in order to address the acceptable level of detection risk.

CONTROL STRUCTURE COMMUNICATIONS REPORTABLE CONDITIONS are significant deficiencies in the design or operation of ICS noted by the

auditor in the course of auditing the financial statements. MATERIAL WEAKNESSES are weaknesses in the internal control that significantly affects the entity’s

ability to prepare reliable financial statements.

COMUNICATION REQUIREMENTS:1. Although the auditor is not responsible for identifying significant deficiencies in the ICS, the auditor

is required to communicate to the audit committee reportable conditions that come to his attention during the audit of financial statements.

2. Communication may be written or oral, but it should always be documented in the working papers.3. Since it is only incidental to the audit, communication may be made either during the course of the

audit or after the audit report is issued.

PERFORMING SUBSTANTIVE TESTS

ASSERTIONS are representations by the management, explicit or otherwise, that are embodied in the financial statements.

Assertions used by the auditor fall into the following categories:1. Transactions/Events (IS) a. completeness b. occurrence c. classification d. accuracy e. cut-off2. Balances (BS) a. completeness b. existence c. rights d. valuation3. Representation and a. completeness b. occurrence and rights & obligations

Disclosure (Notes) c. classification and understandability d. valuation and accuracy

CLASSIFICATION OF PROCEDURES:1. RISK ASSESSMENT PROCEDURES are designed to obtain understanding of the entity and its

environment including its internal control. (Required)2. TEST OF CONTROLS are designed to test the operating effectiveness of controls.

(Not required)3. SUBSTANTIVE TESTS are designed to detect misstatements in the financial

statements which include: (Required) TEST OF DETAILS involves examination of the details or items that comprise the account balance or

transaction class. ANALYTICAL REVIEW PROCEDURES consist of evaluations of financial information made by a study of

plausible relationships among both financial and non-financial data.

TEST OF CONTROLS ARE REQUIRED TO BE PERFORMED when:1. Reliance2. Evidence of Substantive Test is not sufficient

ANALYTICAL PROCEDURES:Basic Premise: A basic premise underlying the use of analytical procedures is that plausible relationship among data may be reasonably be expected to exist and continue in the absence of known conditions to the contrary.

IMPORTANCE: Helps identify unusual transactions.

USES:A. To assist the auditor in PLANNING the nature, timing and extent of other auditing procedures.

Analytical procedures applied at this stage should be focused on:a. Identify areas represent specific riskb. Enhance understanding of client’s business

B. As a SUBSTANTIVE TEST in the TESTING PHASE of the audit. Analytical procedures applied as substantive tests are designed to obtain corroborative evidence about particular assertions related to the account balance or transaction class.

C. As an OVERALL REVIEW of the financial statements in the COMPLETION stage of the audit. Analytical procedures in the completion phase of the audit would include:a. Identifying unusual transactionsb. Determining validity of conclusions

PSA REQUIREMENT: PSA requires that analytical procedures be applied in the PLANNING and COMPETION phases of the audit.

STEPS IN APPLYING ANALYTICAL PROCEDURES:1. Develop expectations2. Compare these expectations with the financial statements

3. Investigate significant unexpected differences (unusual fluctuations)

INFORMATION USED TO DEVELOP EXPECTATIONS:1. Prior years FS2. Anticipated results3. Industry averages

4. Non-financial information5. Typical relationship among FS elements

The effectiveness of analytical procedures is affected by the PREDICTABILITY OF ACCOUNT BALANCES. Presumptions about predictability of the accounts include: Income statement accounts are more predictable compared to Balance Sheet accounts. Accounts that are not subject to management discretion are predictable. Relationships in stable environment are more predictable than those in a dynamic or unstable

environment.

RELATIONSHIP BETWEEN SUBSTANTIVE TESTS AND TESTS OF CONTROLS: Tests of Controls provide the auditors with evidence as to whether prescribed controls are in use

and operating effectively. The results of these tests assist the auditor in evaluating the likelihood of material misstatements having occurred. Substantive tests are designed to detect material misstatements.

Tests of controls are performed to restrict substantive tests and therefore, the more tests of controls the auditor performs, the greater will be the reduction in substantive tests.

DIFFERENT MEANS OF TESTING that can be used by the auditor include:1. AUDIT SAMPLING2. SELECTIVE TESTING3. 100% EXAMINATION

AUDIT SAMPLING involves an application of an audit procedure to less than 100% of the items in the account balance or transaction class such that all units have a chance of selection.

IMPORTANCE: Audit sampling allows the auditor to draw conclusion about the characteristics of the population just by examining sample of evidence.

ASSUMPTION: Audit sampling is performed on the assumption that the SAMPLE IS REPRESENTATIVE OF THE POPULATION, meaning that the sample will possess essentially the same characteristics as the population.

AUDIT SAMPLING CAN BE USED WHEN THERE IS AN AUDIT TRAIL:1. TEST OF CONTROLS2. SUBSTANTIVE TESTS – Test of Details

RISKS INVOLVED:SAMPLING RISK is the risk that the auditor may draw erroneous conclusions because the sample is not truly representative of the population.

SAMPLING RISKS IN SUBSTANTIVE TESTS: INCORRECT ACCEPTANCE – the risk that the sample supports the conclusion that the recorded

account balance is not materially misstated when it is, in fact, materially misstated. INCORRECT REJECTION - the risk that the sample supports the conclusion that the

recorded account balance is materially misstated when, in fact, it is not materially misstated.SAMPLING RISKS IN TEST OF CONTROLS: OVERRELIANCE - the risk that the sample supports the auditor’s planned degree

of reliance on internal control when the true operating effectiveness of the control does not justify such reliance; Assessing control risk too low.

UNDERRELIANCE - the risk that the sample will not support the auditor’s planned degree of reliance on internal control when the true operating effectiveness of the control justifies such reliance; Assessing control risk too high

TYPE 1/ ALPHA RISK - the risk of incorrect rejection and the risk of assessing control risk too high relate to the EFFICIENCY of the audit. This could result to more procedures to be performed than necessary.

TYPE 2/ BETA RISK - the risk of incorrect acceptance and the risk of assessing control risk too low relate to the EFFECTIVENESS of the audit. This could potentially result in materially misstated financial statements from not expanding audit tests to a necessary level. This type of risk is of greater concern to the auditor.

NON-SAMPLING RISK is the risk that the auditor may draw incorrect conclusions even if he will examine the entire population. It includes all aspects of audit risk that are not due to sampling.WAYS TO MINIMIZE THE RISKS:

SAMPLING RISKS NON-SAMPLING RISKS Increase sample size Adequate planning Use appropriate method of selecting sample Review and supervision

SAMPLING IN PERFORMING AUDIT TESTS: ATTRIBUTE SAMPLING is a sampling plan used to estimate the occurrence rate. This is generally

used when performing tests of controls to estimate the rate of deviations from prescribed internal control policies and procedures.

VARIABLE SAMPLING is a sampling plan used to estimate a numerical measurement of a population such as peso value. This is useful when performing substantive tests to estimate the amount of misstatements in the financial statements.

GENERAL APPROACHES TO AUDIT SAMPLING: STATISTICAL SAMPLING is a sampling approach that uses random based selection of sample; uses

the law of probability to measure sampling risk and evaluate sample results. NON-STATISTICAL SAMPLING is a sampling approach that purely uses auditor’s judgment in

estimating the risk, determining the sample size and evaluating sample results; JUDGMENTAL SAMPLING.

STATISTICAL SAMPLING NON-STATISTICAL SAMPLING

Similarities:

- Both methods are acceptable.- Both methods will require auditor’s judgment.- Both methods could provide sufficient, competent evidence.- Both methods cannot assure that the sample will be representative of the

population.

Differences: - Uses law of probability in estimating sampling risk

- Based on auditor’s judgment.

Advantages:

- Allows measurement of sampling risk - Less costly- More efficient sample - easier to apply- Objective evaluation of sample results- Objective measurement of sufficiency

of evidence

FACTORS AFFECTING THE DETERMINATION OF SAMPLE SIZE:TESTS OF CONTROLS SUBSTANTIVE TESTS RELATIONSHIP TO SAMPLE SIZE

Acceptable risk of assessing control risk too low

Acceptable risk of incorrect acceptance

Inverse

Tolerable deviation rate Tolerable error/misstatement InverseExpected deviation rate Expected error Direct

Variance in the population DirectConfidence level Direct

SAMPLE SELECTION Methods: RANDOM NUMBER SELECTION is a method of sample selection that selects sample by matching

random numbers (generated by computer or based on random number table) with population numbering system like document number.

SYSTEMATIC SELECTION is a method of sample selection that uses a fixed interval (computed by dividing the number of physical units in the population by the sample size).

HAPHAZARD SELECTION is a method of sample selection that applies the auditor’s professional judgment in deciding which items should be included in the sample without any conscious bias or special reason for including or omitting items from the sample.

BLOCK SELECTION selects a group of items as sampling units rather than individual items.

PROBABILITY PROPORTIONAL TO SIZE is a method of sample selection that treats each peso as one sampling unit. In this type of sampling, the probability of the item to be selected is directly proportional to its size.

STRATIFICATION/STRATIFIED SAMPLING is the process of dividing the population into sub-population in order to a) decrease the effect of the variance in the population and b) to give emphasis to material items.

SAMPLING APPLICATIONS:TESTS OF CONTROLS SUBSTANTIVE TESTS

Attribute Estimation Classical Variable Sampling Sequential Sampling a. Ratio Estimation Discovery Sampling b. Difference Estimation

c. Mean per Unit Estimation Value weighted Sampling

EVIDENCE“Sufficient, appropriate evidence is to be obtained through inspection, observation, inquiries and confirmations to afford a reasonable basis for an opinion regarding the financial statements under examination.”

AUDIT EVIDENCE - all information used by the auditor in arriving at the conclusions on which the audit opinion is based. This may consist of: ACCOUNTING RECORDS (ex. Books of Accounts, Accounting Manuals, informal records) OTHER CORROBORATING INFORMATION (ex. Confirmation replies, minutes of meetings and

comparable data from competitors)

QUALITIES OF EVIDENCEA. SUFFICIENCY - measure of the quantity/amount of evidence the auditor should obtain

a. The more competent evidence is, the less amount of evidence needed.b. The more material the account balance is, the greater amount of evidence is needed.c. The higher risk is involved, the greater amount of evidence is required.

B. APPROPRIATENESS - measure of the quality of evidence needed to support the auditor’s opinion. It has the following ingredients:a. RELIABILITY - this is influenced by the nature of evidence, its source, and the circumstances

under which it is obtained.Presumptions:

Evidence obtained from independent sources outside an entity is more reliable than evidence secured solely within the entity.

The more effective the internal control structure, the more assurance it provides about the reliability of the accounting data and financial statements.

The independent auditor’s direct personal knowledge, obtained through physical examination, observation, computation and inspection, is more reliable than information obtained indirectly.

b. RELEVANCE - refers to the timeliness of evidence and its relationship to the auditor’s objective.

Ultimately, the decision as to the sufficiency and competence of evidence will depend upon the auditor’s judgment.

AUDIT DOCUMENTATION

WORKING PAPERS are documentation of the audit procedures applied, information obtained and conclusions reached. It may be in the form of data stored on paper, film or other media.

PRIMARY PURPOSES:1. Aid in conduct and supervision of engagement2. Provide principal support for auditor’s report3. Support auditor’s representation of compliance with PSA

CLASSIFICATIONS: Working papers are typically classified into:

CONTINUING/PERMANENT WORKING PAPER FILE contains information of continuing significance to the auditor in performing recurring audit. (Example: Articles of Incorporation and by-laws, copies of major contracts, engagement letter, organizational chart, analyses of long-term accounts and internal control analyses)

CURRENT/TEMPORARY WORKING PAPER FILE contains evidence gathered and conclusions reached relevant to the audit of a particular year. (Example: copy of financial statements, audit program, correspondence with lawyers, customers, bank and management, working trial balance, lead schedules, detailed schedules)

OWNERSHIP: Working papers are property of the auditor and the client has no rights to the working papers prepared by the auditor. Working papers may sometimes serve as a reference source for the client (at the discretion of the auditor) but they should not be considered part or substitute for the client’s records.

CONFIDENTIALITY: Working papers cannot be shown to third parties without the client’s consent except:

a. Security of the State ; orb. Legal/Professional Responsibility requires.

CUSTODY: 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.

FORM AND CONTENT OF WORKING PAPERS: The extent of auditor’s documentation should enable an experienced auditor, having no previous connection with the audit to understand:

a. Nature, timing and extent of procedures performedb. Audit evidence obtainedc. Significant matters identified during the audit and conclusions reached

GUIDELINES FOR THE PREPARATION OF WORKING PAPERS: The following techniques may1. HEADING indicates the name of the client, type of working paper, date or period covered by the

examination.2. INDEXING is the use of lettering or numbering system3. CROSS REFERENCING is providing a trail to facilitate the review of the working papers.4. TICKMARKS are symbols used by the auditor to describe the procedures performed.

COMPLETING THE AUDIT

SUBSEQUENT EVENTS are material transactions or events that occur after the balance sheet date prior to the issuance of the financial statements and the auditor’s report, that require adjustment of or disclosure in the statements.

TYPES OF SUBSEQUENT EVENTS: TYPE 1 - Events that provide evidence about conditions that existed as of the balance sheet

date. This type of event will require Adjustment. TYPE 2 - Events that provide evidence about conditions that arose after the balance sheet date.

This type of event will require Disclosure.

Interim Period Subsequent Period

SUBSEQUENT EVENTS

TYPE 1 TYPE 2

Conditions Existing Conditions Arising ON or BEFORE AFTERBalance Sheet Date Balance Sheet Date

ADJUST FS amounts Consider for NOTE DISCLOSURE

PROCEDURES USED TO IDENTIFY SUBSEQUENT EVENTS:1. Inquiry2. Evaluating client’s procedures3. Reading the minutes of the BOD/stockholder’s meetings4. Audit inquiry to client’s lawyer5. Compare latest available interim FS

Beginning of Balance Sheet Last Day of Issuance ofCurrent Year Date Fieldwork Audit Report

Perform Audit Procedures Responsible Only for Information

To search for subsequent events. “Coming to Auditor’s Attention”

REPORTS ON FINANCIAL STATEMENTS

A. STANDARD UNQUALIFIED REPORT

B. MODIFICATION OF REPORT - affecting the auditor’s opinion

Situation IMMATERIAL MATERIAL PERVASIVEGAAP Departure Unqualified Qualified AdverseScope Limitation Unqualified Qualified Disclaimer

MODIFICATION OF REPORT - not affecting the auditor’s report; Unqualified Report with an emphasis of a matter paragraphConditions:a. Uncertaintyb. Going concern uncertaintyc. Justifiable departure from PFRS/PASd. Inconsistency: would normally require consistency paragraphe. Changes affecting accounting principlesf. Changes in Reporting Entity

C. REPORTS ON CONSOLIDATED FINANCIAL STATEMENTSa. Factors to be considered in deciding whether to act as the Principal Auditor:

1. Materiality of the portion of the FS audited2. Risk of material misstatement of components FS3. Degree of knowledge of overall opinion

b. Procedures to be performed when planning to use the work of other Auditor:1. Competence2. Independence3. Adequacy of work performed

c. Additional procedures to be performed when planning to assume responsibility for the work of other auditors:1. Review of working papers2. Discuss procedures applied by other auditor3. Consider significant findings and discuss with component’s management

D. REPORTS ON COMPARATIVE FINANCIAL STATEMENTSPSA 710 has identified two methods and presentations of comparatives. These are:a. CORRESPONDING FIGURES where amounts and other disclosures for the preceding period are:

Not presented as complete financial statements capable of standing alone, but Are not an integral part of the current period financial statements

b. COMPARATIVE FS where the amounts and other disclosures for the preceding period are: Included for comparison with the financial statements of the current period Do not form part of the current period financial statements

E. OTHER INFORMATIONMATERIAL INCONSISTENCY exists when other information contradicts information contained in the audited financial statements.MATERIAL MISSTATEMENT exists when information, not related to matters appearing in the audited financial statements, is incorrectly stated or presented.

F. SPECIAL PURPOSE AUDIT ENGAGEMENT INCLUDE:a. FS Reports using other comprehensive basis of accounting

b. Reports on specific element/account of FSc. Reports on compliance with contractual agreementd. Report on summarized financial information

G. REPORTS ON PROSPECTIVE FINANCIAL STATEMENTS - future orienteda. FORECASTS are prospective financial statements that present an entity’s expected financial

position, results of operations and cash flows.b. PROJECTION are prospective financial statements that present an entity’s estimate of its

financial position, results of operations and cash flows given one or more hypothetical assumptions.

PROFESSIONAL RESPONSIBILITIESResponsibility for the Financial Statements: MANAGEMENT is responsible for preparing and presenting the financial statements in accordance

with the financial reporting framework. AUDITOR is responsible for forming and expressing an opinion on the financial statements.

AUDITOR’S RESPONSIBILITY FOR FRAUD, ERROR AND NON-COMPIANCE WITH LAWS AND REGULATIONS

FRAUD/IRREGULARITY ERROR NON-COMPLIANCE Definition Intentional

misstatements in the financial statements.

Unintentional Commission/Omission contrary to law/regulations

Examples Management Fraud; Collusion

Oversight/misinterpretation of facts; mistakes in processing of data

Tax evasion; violation of occupational safety and health law

Detection Responsibility

a.Assess the risk of misstatement

b.Design the audit to provide reasonable assurance of detecting material fraud

a.Assess the risk of misstatement

b.Design the audit to provide reasonable assurance of detecting material fraud

a.Understanding the legal framework

b.Perform proceduresc. Obtain evidence of

compliance

Reporting Responsibility

a.To the appropriate level of management

b.To the users of the financial statements

c. To successor auditor

a.To the appropriate level of management

b.To the users of the financial statements

c. To successor auditor

a.To the appropriate level of management

d.To the users of the financial statements

e.To successor auditor Withdrawal

from the Engagement

The auditor may withdraw from the engagement if the management does not take remedial action the auditor considers necessary

The auditor may withdraw from the engagement if the management does not take remedial action the auditor considers necessary

The auditor may withdraw from the engagement if the management does not take remedial action the auditor considers necessary

OTHER TYPES OF SERVICESNature of Service AUDIT REVIEW AGREED-UPON

PROCEDURE COMPILATION

Level of Assurance High/Reasonable Moderate/Limited None None

Type of Report Positive Assurance Negative Assurance

Description and Report

Identification of FS compiled

Basic Knowledge Sufficient understanding of entity’s FS

Basic Procedures Audit procedures deemed necessary

Inquiry/ Analytical Procedures

Agreed Upon Procedure None

Independence Required Not required

Requirement