07/08/2017

1 Introduction to Audit Process

AUD 04

2 Audit Objectives & Responsibilities

- PSA 200 (Revised and Redrafted), Overall Objective of the Independent Auditor and the Conduct
of an Audit in Accordance with the Phil. Standards on Auditing.

3 Objectives of An Audit
To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error.
To express an opinion on whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework.

4 Management Responsibilities
Preparation of financial statements.
Establish, implement & maintain internal controls relevant in FS Preparation.
Identification of the applicable financial reporting framework.
Exercise of judgment in making reasonable accounting estimates and apply appropriate
accounting policies.

5 Management Responsibilities
Provide the auditor with all information, such as records and documentation; other information
needed by the auditor in connection with the audit of financial statements.
Provide the auditor with unrestricted access to those within the entity from whom the auditor
determines necessary to obtain sufficient appropriate evidence.

6 Auditors Responsibilities
Obtain reasonable assurance that the FS are free from material misstatements.
Express opinion whether the FS are in accordance with applicable financial reporting framework.
Report on the financial statements.

7 Basic Concepts Underlying a Financial Statement Audit

- PSA 200 (Revised and Redrafted), Overall Objective of the Independent Auditor and the Conduct
of an Audit in Accordance with the Phil. Standards on Auditing.
- PSA 230 (Revised), Audit Documentation
- PSA 315, Understanding the Entity & Its Environment & Assessing the Risks of Material
Misstatements
- PSA 320, Audit Materiality
- PSA 330, Auditors Procedures in Response to Assesssed Risks
- PSA 500 (Revised), Audit Evidence
- PSA 700 (Revised), Forming an Opinion & Reporting on FS
- PSA 705 (Revised), Modification To the Opinion in the Independent Auditors Report
-
-

8 Basic Concepts in FS Audit

Auditor Independence

1
 07/08/2017

Auditor Independence
Professional skepticism
Conduct & Scope of an Audit in accordance with PSAs
Audit Evidence & FS Assertions
Audit Materiality
Audit Risk
Professional Judgment
Inherent limitations of an audit
9 Independence




Independence enhances the auditors ability to act with integrity, to be objective & to maintain
professional skepticism.

10 Professional Skepticism
Recognize that circumstances may exist that cause the FS to be materially misstated.
The auditor neither assumes that the client is dishonest nor of unquestioned honesty.
Auditors use past experience to assess honesty and integrity of client management.
However, a belief that management is honest does NOT relieve the auditor the need to maintain
professional skepticism.
Obtains sufficient and appropriate evidence to support management representation.

11 Professional Skepticism
Professional skepticism requires the auditor to be alert about:
Evidence that contradicts other evidence obtained.
Info that brings into question the reliability of documents and responses to be used as
evidence.
Conditions that may indicate possible fraud (fraud risks factors).

12 Professional Skepticism
Maintaining professional skepticism reduces the risk of:
Overlooking unusual circumstances
Over-generalizing when drawing conclusions
Using inappropriate assumptions in designing nature, timing & extent of audit procedures and
evaluating the results

13 Conduct & Scope of an Audit In Accordance with PSAs

Conduct of an Audit In Accordance with PSAs.
The auditor shall comply with all PSAs relevant to the audit.
A PSA is relevant to the audit when the PSA is in effect & circumstances addressed by such PSA
exists.
In exceptional circumstances, the auditor may judge it necessary to depart from a req. in PSA
which does not meet the objective of the audit. Perform alternative procedures.
If compliance with PSA cannot be achieved, the auditor shall modify his opinion or withdraw
from the engagement.

2
 07/08/2017

14 Conduct & Scope of an Audit In Accordance with PSAs

Scope of Audit
Audit procedures that, in auditors judgment & based on PSAs, are deemed appropriate in the
circumstances to achieve the objective of the audit.
PSAs do not override the local laws & regulations governing an audit of FS.
However, compliance with such local laws & regulations will not automatically comply with
PSAs.

15 Audit Evidence & FS Assertions

Audit Evidence
All the information used by auditor in arriving at the conclusions on which audit opinion is
based.
Includes (1) accounting records & (2) other information.
Auditors are not expected to address all information that may exist (sampling).
Cumulative in nature
May include evidence from other sources.
16 Audit Evidence & FS Assertions
Management assertions
Representations of management, explicit or implicit, about the recognition, measurement,
presentation, classification and disclosure of various elements of financial statements & related
disclosures.
Auditors assess the risks of material misstatement & design & perform tests of controls and
substantive tests based on these assertions.

17 Audit Evidence & FS Assertions

Management assertions include assertions about presentation & disclosure, existence &
occurrence, completeness & valuation and allocation related to:
Account balances
Classes of transactions and
Presentation & disclosures
In the financial statements

18 Audit Materiality
Information is material if it affects the decisions of the users taken on the basis of the FS.
Materiality is relative.
Depends on the size and nature of the item.
The assessment of what is material is a matter of professional judgment of the auditor.

19 Audit Risk
The likelihood or possibility that the auditor expresses
(1) an inappropriate audit opinion
(2) when the financial statements are materially misstated.
Audit risk may be assessed either in
Quantitative terms
Non-quantitative terms

3
 07/08/2017

Non-quantitative terms

20 Audit Risk
Audit risk is a function of
the possibility of material misstatement and
the possibility that the auditor will not detect such misstatement

21 Audit Risk
Inherent Risk
the susceptibility of an assertion to a misstatement that could be material assuming that there
were no related internal controls.
22 Audit Risk
Control Risk
the likelihood that a misstatement that could occur in an assertion and that could be material
and will not be prevented, detected or corrected on a timely basis by the entitys internal
control

23 Audit Risk
Detection Risk
the likelihood that the auditor will not detect a misstatement that exists in the financial
statements.
While inherent and control risks are function of clients accounts and systems, detection risk is a
function of the auditors procedures.
Therefore, among the components of the audit risk, detection risk is the only component that
the auditor can control.
Thus, the auditor plans the nature, timing and extent of audit procedures to reduce the audit
risk to an acceptably low level.

24 Audit Risk Model

=
Inherent risk and control risk can be assessed separately or combined.
Inherent risk and control risk have inverse relationship with acceptable detection risk.
Acceptable detection risk has inverse relationship with audit procedures/evidence.

25 Professional judgment
The application of relevant knowledge and experience, within the context provided by auditing,
accounting and ethical standards, in reaching decisions about courses of action that are
appropriate in the circumstances of the audit engagement.

26 Overview of Audit Process

27 Pre-Engagement Procedures

Acceptance & continuance decisions

Establishing pre-conditions for an Audit

4
 07/08/2017

28 Pre-Conditions for an Audit

Pre-conditions for an audit:
Applicability of financial reporting framework
Obtain agreement of management
The auditor shall not accept a limited engagement as audit engagement.
If the pre-conditions are not met, the auditor shall not accept the proposed audit engagement.

29 Terms of Engagement
The auditor and the client should agree on the terms of the engagement.
It is in the interest of both parties, not only of the auditor, to have an engagement letter before
the commencement of the engagement to avoid any misunderstandings with respect to the
engagement.

30 Terms of Engagement
Engagement Letter documents and confirms:
Auditors appointment
Objective and scope of audit
Auditors & managements responsibilities
Form of any reports to be issued

31 Principal Contents of Engagement Letter

Scope of the audit.
The form of any other communication to be issued.
Limitations of the engagement.
Arrangements regarding planning & performance of audit including composition of audit team.
Management to issue written representation.

32 Principal Contents of Engagement Letter

Timely submission of requirements.
Facts that may affect FS.
Arrangement as to Fees and Billings.
Acknowledgement of receipt of engagement letter and agreement to its terms.

33 Principal Contents of Engagement Letter

When relevant, may also include:
Arrangements regarding
other auditors & experts.
other internal auditor or other client personnel.
previous auditor in case of initial audits.
Restriction as to the auditors liabilities.
Reference to any further agreements.
Any obligation to provide audit working papers to 3rd parties.

5
 07/08/2017

Any obligation to provide audit working papers to 3rd parties.

34 Audits of Components
Whether to send separate engagement letters consider:
Who appoints auditor of component
Separate report
Legal requirements
Extent of work by other auditors
Degree of ownership by parent
Degree of independence of the component management from parent entity

35 Recurring Audits
Send new engagement letter:
Client misunderstands the objective of audit
Revision on terms
Recent change in ownership
Change and size and nature of client business
Change in legal or regulatory requirements
Change in financial reporting framework
Change in other reporting requirements

36 Changes in the Terms of Engagement

An auditor who, before completion of the engagement, is requested to change the engagement
to one which provides a lower level of assurance, should consider the appropriateness of doing
so.
Possible Reasons
1. Change in circumstances/requirements
2. Misunderstanding as to nature of engagement
3. Restriction on the scope (whether client-imposed or circumstance-imposed)

37 Accepting a Change in Engagement

If the change is reasonably justified, the report would be based on revised terms without
reference to original engagement.
Except for agreed-upon procedures where reference to procedures already performed is a normal
part of the report.
38 Rejecting a Change in Engagement
If the change in engagement is not reasonably justified, the auditor shall continue with the
original engagement.
If the auditor is not permitted to continue the original engagement, the auditor shall withdraw &
consider whether there is any obligation to report to other parties (such as those charged with
governance or shareholders).

39 Audit Planning

Establishing the overall audit strategy for the engagement;

6
 07/08/2017

Developing a detailed audit plan.

40 Audit Planning
Benefits of Audit Planning
Devote appropriate attention to important areas
Identify & resolve potential problems on timely basis
Helps organize & manage the audit engagement
Assist in selection of members of audit engagement team members
Facilitating direction & supervision
Assisting coordination of work by others
41 Audit Planning
Principal Planning Activities
Understanding client business & environment
Assessing the possibility of non-compliance
Establishing materiality and assessing risks
Identifying related parties
Performing preliminary analytical procedures
Consider use of experts, internal auditors, entity personnel & other auditors
Development of overall strategy and detailed audit plan

42 Study and Evaluation of Internal Controls

Obtain and document an understanding of internal control
Make preliminary assessment of control risk
Determine response to assessed risks
Reassess control risk
Determine the nature, timing and extent of substantive tests

43 Study and Evaluation of Internal Controls

Obtain and document an understanding of internal control
Make preliminary assessment of control risk
Determine response to assessed risks
Reassess control risk
Determine the nature, timing and extent of substantive tests

44 Substantive Testing
Procedures used to detect material misstatements at the assertion level.
Substantive Analytical procedures
Tests of Details
Substantive tests of transactions (test of transactions)
Substantive tests of balances (test of balances)

45 Substantive Testing
After gathering evidence, the auditor determines whether adjustments to FS should be made.
The conclusions reached based on evaluation of evidence gathered become the basis for the
expression of opinion & preparation of the audit report.

7
 07/08/2017

expression of opinion & preparation of the audit report.

46 Completing the Audit
Wrap-up procedures including:
Final analytical review
Reads minutes of board, committee, stockholders meetings
Obtains management representation letter
Finalize materiality jugments
47 Completing the Audit
Wrap-up procedures including:
Summarize and evaluates audit findings
Review working papers (including EQR if applicable)
Review FS presentation and disclosures for adequacy
Consider subsequent events
48 Completing the Audit
Audit findings are communicated to the management and where appropriate to those charged
with governance.

49 Issuance of Audit Report

Auditor prepares the audit report containing the auditors conclusion regarding the fairness of FS.
Unmodified opinion
Qualified opinion
Adverse opinion
Disclaimer of opinion

50 Post-audit responsibilities
Audit debriefing
Consider events during the audit
Analyze activities within the audit
Produce recommendations

51 End of Discussion
QUESTIONS