Engagement to Review

Financial Statements

Philippine Standard on
Review Engagements
2400
Objective of a Review of
Financial Statements

 to enable a practitioner to state whether, on

the basis of procedures performed, anything
has come to the practitioner’s attention that
causes the practitioner to believe that the
financial statements are not prepared, in all
material respects, in accordance with the
applicable financial reporting framework
(negative assurance)..
General Principles Governing a
Review of Financial Statements

 The practitioner should comply with the Code of

Professional Ethics
 The practitioner should conduct a review in
accordance with PSREs
 The practitioner should conduct the review with an
attitude of professional skepticism
 The practitioner should obtain sufficient appropriate
evidence, primarily through inquiry and analytical
procedures to be able to draw conclusions
Scope of a Review

 Refers to the procedures that are deemed

appropriate in the circumstances to achieve
the objective of the review.
Moderate Assurance

A review engagement provides a moderate

level of assurance that the information
subject to review is free of material
misstatement.
 This is expressed in the form of negative
assurance
Materiality

 The practitioner should apply the same

materiality considerations as would be
applied if an audit opinion on the financial
statements were being given.
Procedures to be Performed

 Consists principally of inquiry and

analytical procedures.
 Involves application of audit skills and
techniques in gathering evidence
 Does not involve assessment of control risk,
test of records and responses to inquiries.
Conclusion

 The report should contain a clear written

expression of negative assurance.
 The Unqualified Review Report
 Modification of the Review Report
– Violation of Financial Reporting Standards
– Scope limitation
Reporting

 The Unqualified Review Report

 Modification of the Review Report

- Violation of Financial Reporting Standards

- Scope Limitation
Engagement to Perform Agreed-Upon
Procedures Engagements

Philippine Standard on
Related Services 4400
Objective

 for the auditor to carry out procedures of an

audit nature to which the auditor and the
entity and any appropriate third parties have
agreed and to report on factual findings.
General Principles Governing Agreed-
upon Procedures Engagements

 The auditor should comply with the Code of

Professional Ethics (Independence is not a
requirement)
 The auditor should comply with PSRS and
the terms of the engagement
No Assurance Provided

 As the auditor simply provides a report of the

factual findings of agreed-upon procedures,
no assurance is expressed. Instead, users
of the report assess for themselves the
procedures and findings reported by the
auditor and draw their own conclusions from
the auditor’s work.
General Principles Governing Agreed-
upon Procedures Engagements

 The auditor should comply with the Code of

Professional Ethics (Independence is not a
requirement)
 The auditor should comply with PSRS and
the terms of the engagement
Procedures Performed

 The auditor should carry out the procedures

agreed upon and use the evidence obtained
as the basis for the report of factual findings
of data.
Reporting Responsibility

 The report on an agreed-upon procedures

engagement needs to describe the purpose
and the agreed-upon procedures of the
engagement in sufficient detail to enable the
reader to understand the nature and the
extent of the work performed ”
Restrictions on the
Distribution of Report

 The report is restricted to those parties that

have agreed to the procedures to be
performed since others, unaware of the
reasons for the procedures, may misinterpret
the results.
Engagement to Compile
Financial Statements

Philippine Standard on
Related Services 4410
Objective of a Compilation of
Financial Statements

 for the accountant to use accounting

expertise, as opposed to auditing expertise,
to collect, classify and summarize financial
information.
General Principles Governing a
Compilation of Financial Statements

 The accountant should comply with the Code

of Professional Ethics (Independence is not a
requirement)
 The accountant should comply with PSRS
 In all circumstances when the accountant’s
name is associated with the financial
information compiled, the accountant should
issue a report
No Assurance Provided

 Theprocedures performed in doing a

compilation engagement are not designed
and do not enable the accountant to express
any assurance
Procedures Performed

 Collect, classify and summarize financial

data
 Read the Compiled Financial Statements
 Does not involve

- assessment of control risks

- verification of any matters or explanations
- inquiries of management as to
completeness or accuracy of data.
Reporting Responsibility

 The report should identify the financial

statements compiled
 The report should clearly indicate that no
assurance is provided on the financial
statements
 The information compiled should contain a
reference such as “Unaudited”, “Refer to
Compilation Report” or Compiled without
Audit or Review”
The Compilation Report

 The Standard Compilation Report

 Modification of the Report

- Violation of Financial Reporting Standards

- Scope Limitation
Terms of Audit Engagements

Philippine Standard on
Auditing 210
Purpose

To establish standards and provide guidance on:

 Agreeing the terms of the engagement with the
client; and
 The auditor’s response to a request by a client to
change the terms of an engagement to one that
provides a lower level of assurance.
Terms of Engagement

The auditor and the client should agree on

the terms of the engagement.
 The agreed terms would need to be recorded
in an audit engagement letter or
 other suitable form of contract.
Principal Contents of Engagement
Letter/Contract

 The objective of the audit of financial statements;

 Management’s responsibility for the financial statements;
 Management’s responsibility for establishing and maintaining
effective internal control;
 The scope of the audit;
 The form of any reports or other communication of results of
the engagement;
 unavoidable risk that even some material misstatement may
remain undiscovered; and
 Unrestricted access to whatever records, documentation and
other information requested in connection with the audit.
Other information to be included
 Arrangements regarding the planning and performance of the audit.
 Expectation of receiving from management written confirmation
concerning representations made in connection with the audit.
 Request for the client to confirm the terms of the engagement by
acknowledging receipt of the engagement letter.
 Description of any other letters or reports the auditor expects to
issue to the client.
 Basis on which fees are computed and any billing arrangements.
To be added, when relevant

 Arrangements concerning the involvement of other auditors

and experts in some aspects of the audit.
 Arrangements concerning the involvement of internal
auditors and other client staff.
 Arrangements to be made with the predecessor auditor, if
any, in the case of an initial audit.
 Any restriction of the auditor’s liability when such possibility
exists.
 A reference to any further agreements between the auditor
and the client.
Separate letter to Components

Factors that influence the decision

 Who appoints the auditor of the component.
 Whether a separate auditor’s report is to be
issued on the component.
 Legal requirements.
 The extent of any work performed by other
auditors.
Recurring Audits

Factors that may make it appropriate to send a new letter:

 Any indication that the client misunderstands the objective
and scope of the audit.
 Any revised or special terms of the engagement.
 A recent change of senior management or those charged
with governance.
 A significant change in ownership.
 A significant change in nature or size of the client’s business.
 Legal or regulatory requirements.
Change in Engagement

Consider
 Reasonableness of basis for requesting a change
 Legal or contractual implications of the change.

The auditor should not agree to a change of

engagement where there is no reasonable
justification for doing so.
Change is not reasonable when..

 change relates to information that is incorrect,

incomplete or otherwise unsatisfactory.

E.g. The auditor is unable to obtain sufficient

appropriate audit evidence regarding receivables
and the client asks for the engagement to be
changed to a review engagement.
Change is reasonable when…

A change in circumstances that affects the

entity’s requirements or
 A misunderstanding concerning the nature of
service originally requested
When there is reasonable justification

 Where the terms of the engagement are

changed, the auditor and the client should
agree on the new terms.
 the report issued would be that appropriate
for the revised terms of engagement.
To avoid confusion

No reference is made to:

 The original engagement; or
 Any procedures that may have been performed in
the original engagement,
except where the engagement is changed to an
engagement to undertake agreed-upon procedures
and thus reference to the procedures performed is a
normal part of the report.
If unable to agree to a change in
engagement

The auditor should continue with original

engagement

If not allowed to continue…

 withdraw and consider whether there is any obligation,
either contractual or otherwise, to report to other parties,
such as those charged with governance or shareholders,
the circumstances necessitating the withdrawal
Initial Engagements- Opening
Balances

Philippine Standard on
Auditing 510
Purpose

 Toestablish standards and provide guidance

regarding opening balances when financial
statements are audited for the first time or
when the financial statements for the prior
period were audited by another auditor.
Additional Audit Evidence needed on
Initial Engagements

1. The opening balances do not contain misstatements that

materially affect the current period’s financial statements;

2. The prior period’s closing balances have been correctly

brought forward to the current period or, when appropriate,
have been restated; and

3. Appropriate accounting policies are consistently applied or

changes in accounting policies have been properly
accounted for and adequately presented and disclosed.
Factors influencing the nature and
amount of evidence needed regarding
opening balances

1. Materiality of the opening balances.

2. Risk of misstatement
3. Accounting policies followed by the entity
4. Whether the prior period’s financial
statements were audited or not.
Audit Conclusion and Reporting

 If the auditor is unable to obtain sufficient

appropriate audit evidence concerning
opening balances, the auditor’s report may
include:
1. Qualified Opinion
2. Disclaimer of Opinion
3. Qualified or Disclaimer of Opinion on the Income
Statement and Unqualified Opinion on the Balance
Sheet.
Audit Conclusion and Reporting

A qualified or adverse opinion is issued when:

 The opening balances contain
misstatements that materially affect the
current period’s financial statements; or
 The accounting policies have not been
consistently applied and the change has not
been properly accounted for and disclosed
in the financial statements.
Audit Conclusion and Reporting

 If the predecessor auditor’s report was

modified, the auditor would consider the
effect thereof on the current period’s
financial statements.
 If the matter that caused the predecessor
auditor to modify his audit report is still
relevant and material to the current period’s
financial statements, the auditor should
modify his report on the current period’s
financial statements accordingly.
Analytical Procedures

Philippine Standard on
Auditing 520
Purpose

 Toestablish standards and provide guidance

on the application of analytical procedures
during an audit.
Analytical Procedures- Defined

“Analytical procedures” means evaluations of

financial information made by a study of
plausible relationships among both financial
and non-financial data.
Assumption Underlying
Analytical Procedures

 The application of analytical procedures is

based on the expectation that relationships
among data will exist and continue in the
absence of known conditions to the
contrary.
Uses of Analytical Procedures

 As a planning tool to assist in understanding the business and in

identifying areas of potential risk.

 As a substantive test to reduce the detection risk for specific

financial statement assertions

 As an overall review to evaluate the validity of the conclusions

reached regarding the financial statement presentation.
Nature of Analytical Procedures

 Comparison of the entity’s financial information with:

– Comparable information for prior periods
– Anticipated results
– Industry information

 Consideration of relationships
– Between financial information and non-financial information
– Among elements of financial information
Steps in Applying
Analytical Procedures

1. Develop expectations regarding the

financial statements

2. Compare expectations with the financial

statements under audit

3. Investigate significant differences

Factors influencing the extent of
reliance on analytical procedures

1. Predictability of information

2. Materiality of items involved

3. Risks involved
Investigating Unusual Items

 Inquiries of Management

 Corroboration of Management’s responses

 Application of other audit procedures

 Audit Sampling and Other
Selective Testing Procedures

Philippine Standard on
Auditing 530
Purpose

 To establish standards and provide guidance

on the use of audit sampling items for testing
to gather audit evidence.
Different Means of Testing

 Selecting all items

 Selecting specific items

 Audit Sampling
Audit Sampling- Defined

“ Audit sampling” involves the application of

audit procedures to less than 100% of the
items within an account balance or
transaction class such that all sampling units
have a chance of selection.
Using Audit Sampling

Audit sampling may be used when performing:

1. Tests of Control
2. Substantive Tests
Risk Consideration

 In obtaining evidence, the auditor should assess

audit risk and design audit procedures to ensure
this risk is reduced to an acceptably low level.
 Components of Audit Risks
1. Inherent Risk
2. Control Risk
3. Detection Risk
 Sampling Risk
 Non-Sampling Risk
Basic Steps in using Audit Samping

1. Define the objective

2. Determine the procedure

3. Determine the sample size

4. Select the sample

5. Apply the procedures

6. Evaluate the results

Factors influencing Sample Size-
Test of Control

 Intended reliance on internal control

 Tolerable deviation rate

 Expected deviation rate

 Acceptable sampling risk

Factors influencing Sample Size-
Substantive Test

 Assessed level of Inherent and Control risks

 Tolerable error

 Expected error

 Confidence level/ Acceptable sampling risk

 Variability within the population

Sample Selection Methods

 Random number selection

 Systematic selection

 Haphazard selection

 Block selection
Sampling Approaches

 Statistical

 Non-statistical
USING THE WORK OF
ANOTHER AUDITOR

Philippine Standard on
Auditing 600
Definition

1. “Principal Auditor” means the auditor with

responsibility for reporting on the financial
statements of an entity when those financial
statements include financial information of one or
more components audited by another auditor.
2. “Component” means a division, branch, subsidiary,
joint venture, associated company or other entity
whose financial information is included in the
financial statements audited by principal auditor.
Factors to be considered in
Deciding whether to Act as
Principal Auditor

1. The materiality of the portion of the financial

statements audited.
2. The risk of material misstatements in the
financial statements of the components.
3. Auditor’s degree of knowledge regarding the
business of the components
Procedures performed when planning
to Use the Work of Other Auditor

1. Obtain sufficient appropriate evidence that the work of other

auditor, is adequate for the principal auditor’s purposes.
2. Consider the competence of the other auditor
3. Advise the other auditor of the
 Independence requirements
 Accounting, auditing and reporting requirements
 The use that is to be made of the other auditor’s work
Procedures performed when planning
to assume responsibility

1. Review working papers of the other auditor

2. Discuss with the other auditor the audit procedures applied
3. Consider significant findings of the other auditor and
discuss these with the component’s management.
Reporting Considerations-
Principal auditor not to Use the Work
of Other Auditor

 When the principal auditor concludes that

the work of other auditor can not be used,
the principal auditor may either:
1. Perform procedures to obtain satisfaction about
the financial statements of the component; or
2. Express a qualified opinion or disclaimer of
opinion because of a scope limitation.
Reporting Considerations- Principal
auditor Assumes Responsibility for the
Work of Other Auditor

 When the principal auditor assumes

responsibility for the work of other auditors,
a standard unqualified report may be
issued.
 If the other auditor, issues a modified report,
the principal auditor should consider the
nature and significance of matter that
causes the other auditor to modify his report
and its effect on the combined or
consolidated financial statements .
Reporting Considerations- Division of
Responsibility

 When the principal auditor bases the audit

opinion on the financial statements taken as
a whole solely upon the report of another
auditor regarding the audit of one or more
components, the principal auditor’s report
should state this fact clearly and should
indicate the magnitude of the portion of the
financial statements audited by the other
auditor.
CONSIDERING THE WORK OF
INTERNAL AUDITING

Philippine Standard on
Auditing 610
Purpose

 To establish standards and provide

guidance to external auditors in
considering the work of internal auditing
Definition

“Internal Auditing” means an appraisal activity

established within an entity as a service to
the entity.
Common Activities of Internal Auditing

 Review of accounting and internal control systems

 Examination of financial and operating information
 Review of the economy, efficiency and effectiveness of
operations
 Review of compliance with laws, regulations and other
requirements
External Auditor’s Responsibility

1. Obtain sufficient understanding and make a

preliminary assessment of the internal audit activities

2. Evaluate and test the work of internal auditing

Preliminary Assessment of
Internal Auditing

The following criteria should be considered

when making a preliminary assessment of
internal auditing
1. Organizational status
2. Scope of functions
3. Technical competence
4. Due professional care
USING THE WORK OF AN
EXPERT

Philippine Standard on
Auditing 620
Purpose

 To establish standards and provide

guidance on using the work of an expert
as audit evidence
Definition

“Expert” means a person or firm possessing

special skill, knowledge and experience in a
particular field other than accounting and
auditing.
Common Examples where the
Expert’s Work is needed

1. Valuation of real property, works of arts, and precious

stones.
2. Determination of pension expense using actuarial
assumptions
3. Measurement of work completed on contracts in
progress
4. Interpretations of contracts, laws and regulations
Determining the Need for an Expert

When determining the need to use the work of an

expert, the auditor would consider
 The materiality of the financial statement item being
considered
 The risk of misstatements based on the nature and
complexity of the matter being considered
 The quantity and quality of other audit evidence available
Using the Work of An Expert

When planning to use the work of an expert, the auditor should:

 Assess the competence of the expert
 Assess the objectivity of the expert
 Evaluate the adequacy of the expert’s work for the auditor’s
purpose
 Assess the work of the expert
Reference to an Expert in the
Auditor’s Report

 When issuing an unmodified report, the

auditor should not refer to the work of an
expert.
 If as a result of the work of an expert, the
auditor decides to issue a modified report,
it may be appropriate to refer to the work
of the expert in order to explain clearly the
nature of the modification.
 Quality Control for Audits of
Historical Financial Information

Philippine Standard on
Auditing 220
Purpose

 to establish standards and provide guidance

on specific responsibilities of firm personnel
regarding quality control procedures
 for audits of historical financial information,
including audits of financial statements.
Quality Control

– The engagement team should implement quality

control procedures that are applicable to the
individual audit engagement.
Leadership Responsibilities

 Theengagement partner should take

responsibility for the overall quality on
each audit engagement to which that
partner is assigned.
Ethical Requirements

 Theengagement partner should consider

whether members of the engagement team
have complied with ethical requirements.
Independence

The engagement partner should:

 Obtain relevant information from the firm and, to identify
and evaluate circumstances and relationships that create
threats to independence;
 Evaluate information on identified breaches, if any, of the
firm’s independence policies and procedures
 Take appropriate action to eliminate such threats or
reduce them to an acceptable level by applying
safeguards.
 Document conclusions on independence and any relevant
discussions with the firm that support these conclusions.
Acceptance and Continuance of Client
Relationships and Specific
Audit Engagements

The engagement partner should be satisfied that

 appropriate procedures have been followed,
and
 that conclusions reached in this regard are
appropriate and have been documented.
Assignment of Engagement Teams

The engagement partner should be satisfied

that the engagement team collectively has the

– appropriate capabilities
– competence and
– time
Engagement Performance

The engagement partner should take responsibility for

the
 direction,
 supervision and
 performance of the audit engagement
– Consultation
– Differences of opinion
– Quality control review
Monitoring

The engagement partner considers the results of the

monitoring process
 Whether deficiencies noted in that information may
affect the audit engagement; and
 Whether the measures the firm took to rectify the
situation are sufficient in the context of that audit.