Module 2 - The Risk-Based Financial Statement Audit - Client Acceptance, Audit Planning, Supervision and Monitoring
Module 2 - The Risk-Based Financial Statement Audit - Client Acceptance, Audit Planning, Supervision and Monitoring
0 Intended
Learning
Outcomes
Module 2: The Risk-based Financial Statement Audit –
Client Acceptance, Audit Planning, Supervision and
Monitoring
At the end of the module, the students should be able to:
2.1 Explain the overview of the risk-based audit process
2.2 Illustrate and explain the pre-engagement procedures
2.3 Explain the scope and purposes of audit planning
2.3.1 Identify and discuss the essential planning procedures
2.3.1.1 Knowledge of the business
2.3.1.2 Preliminary analytical procedures
2.3.1.3 Materiality
2.3.1.4 Assessing and managing audit risks
2.3.1.5 Overall audit plan and audit program (experts, internal auditor, other
independent auditors)
2.4 Perform the direction, supervision, and review
2.5. discuss the:
● general principles governing the audit of financial statements
● the major classification of generally accepted auditing standards (GAAS)
● auditor’s responsibilities in an audit
● salient features of the SEC Code of Corporate Governance
2.6. explain the importance of adhering to the GAAS.
2.1 The
Independent
Financial
Statement Audit
General Requirements when Auditing Financial Statements
The auditor should:
● comply with relevant ethical requirements incorporated in the Code of
Ethics, Board of Accountancy-CE.pdf
● Download Board of Accountancy-CE.pdf
● , for PAs.
● conduct an audit based on the PSAs.Auditing and Assurance Standards
Council - Downloads - Philippine Standards on Auditing (PSAs).mhtml
● Download Auditing and Assurance Standards Council - Downloads -
Philippine Standards on Auditing (PSAs).mhtml
●
● apply professional judgment in planning and performing the audit.
● should obtain sufficient and appropriate audit evidence to reduce the audit
risk to an acceptable low level.
● should have an attitude of professional skepticism (questioning mind,
critical assessment on the sufficiency, appropriateness of audit evidence)
● conflict of interest - exists between the managers and the users of the
financial statements which is why the users demand audited financial
statements that are realistic and free from bias.
● the expertise of an auditor - is needed to verify the reliability of the financial
statements being presented to users.
● the remoteness of the financial records- users do not have access to the
financial records and the auditor can assist them to verify the reliability of the
financial records.
● financial consequences - misleading financial information may result in
wrong economic decisions by management.
Nature of Evidence
● Audit evidence are pieces of information that are gathered during the audit
and can persuade the auditor about the fairness of the financial statements.
○ Audit evidence is persuasive rather than conclusive.
○ Due to inherent limitations, even if the audit is conducted based on
the PSAs, material misstatements in the Financial Statements may
not be detected.
○ The auditor's opinion on the Financial statement attests that the FS
was prepared in accordance with the Financial Reporting
Framework.
○ It is not an assurance of the future viability of the entity, nor to the
efficiency and effectiveness of its operations conducted by the
management.
Let us watch the video below to understand the Independent Financial Statement Audit
https://youtu.be/VoSUpe6FU0k
Links to an external site.
https://youtu.be/WzlBl9Q6rM0
Links to an external site.
https://youtu.be/p7_6FutPolo
2.2 Professional
Standards
(including Quality
Control)
Standards
● established to measure the quality of performance of individuals and
organizations.
● relating to the accounting profession concerns the CPAs :
○ Professional qualities
○ judgment exercised in the performance of an engagement.
○ quality control policies and procedures.
General Standards
1. Technical Training and Proficiency of the auditor
2. Independence in the mental attitude of the auditor
3. Due Professional Care is exercised by the auditor in the performance of the audit and
preparation of the audit report.
Standards of Fieldwork
4. Planning - the work should be properly planned and assistants are properly
supervised
5. Internal Control Considerations-a proper study and evaluation of the existing
internal control and a test for any restrictions on the auditing procedures.
6. Evidential Matter- competent and sufficient evidence gathered through inspection,
observation, inquiries, and confirmation as a reasonable basis for an opinion.
Standards of Reporting
7. The report shall state whether the financial statements are in accordance with the
GAAP.
8. The Inconsistencies in the application of the principle from the prior period to the
present shall be identified ( circumstances).
9. Informative disclosures shall be regarded as reasonably adequate unless otherwise
stated in the report.
10. Opinion -
● in the audit report, an opinion shall be expressed regarding the financial
statements, taken as a whole, or an assertion to the effect that an opinion can
not be expressed.
○ When the overall opinion can not be expressed, the reasons for it
should be stated.
● An auditor's name associated with the report gives a clear-cut indication of
the character of the auditor's examination and the degree of responsibility
that the auditor is taking.
https://youtu.be/Z4ND0Hgi4GQ
Links to an external site.
2.3 The Auditor's
Responsibilities
Responsibility to Prevent and Detect Fraud (PSA 240)
Links to an external site.
is the main responsibility of :
1. Management
● Must establish a strong control environment and maintain policies and
procedures to assist in achieving the objective of ensuring the orderly and
efficient conduct of the entity’s business.
● An appropriate control environment as a deterrent to fraud includes
establishing:
○ Code of conduct
○ Ethics/Fraud Policy
○ Ethics and whistleblower program
○ Hiring and promotion guidelines, exit interview
○ Oversight by the Audit Committee, Board, or other oversight body
○ Investigation of reported issues and remediation of confirmed
violations.
2. Individuals charged with governance
● ensure the integrity of the entity's accounting and financial reporting systems
and that appropriate controls are in place.
Related Topic:
https://youtu.be/nr8a453-1yo
Links to an external site.
https://youtu.be/oPvXVFsCvbs
2.4 SEC Code of
Corporate
Governance
Code of Corporate Governance for Public Companies and Registered Issuers SMC
24-2019
Download SMC 24-2019
was issued by SEC as part of its efforts to promote good corporate governance in the
country.
Categories of
Fraud
(AICPA/ACFE)
Red Flags
● Key warning signs of Improper or Aggressive Accounting
○ incorrect billings,
○ holding the books open,
○ capitalizing expenses,
○ complex revenue recognition
● Conditions that are normally present whenever fraud is committed.
○ Living beyond their means
○ Experiencing financial difficulties
○ Excessive organizational pressure
Internal Auditors should be alert in determining red flags or possible indicators of fraud.
Financial Shenanigans
● actions that intentionally distort reported financial performance and
financial condition
○ recording revenue too soon or of questionable quality,
○ recording non-existing revenues,
○ boosting income with one-time gains,
○ recording current expenses/ revenue to a later or earlier period,
○ failing to record or reduce liabilities
○ shifting current revenue to a later period
○ shifting future expenses to the current as a special charge