CHAPTER

1 AUDIT ON REVIEW
2 THE PROFESSIONAL STANDARDS
3 THE AUDITOR'S RESPONSIBILITY
4 THE AUDIT PROCESS- ACCEPTING AN ENGAGEMENT
5 AUDIT PLANNING
6 CONSIDERTION OF INTERNAL CONTROL
7 AUDITING IN A COMPUTERIZED ENVIRONMENT
8 PERFORMING SUBSTANTIVE TEST
9 AUDIT SAMPLING
10 COMPLETING THE AUDIT
11 AUDIT REPORTS ON FINANCIAL STATEMENTS
12 ASSURANCE AND RELATED SERVICES
13 THE CODE OF ETHICS AND REPUBLIC ACT 9298
AUDITING
1 IS A SYSTEMATIC PROCESS BY MEANS OF AN ORDERED STRUCT
2 IT INVOLVES OBTAINING AND EVALUATING EVIDENCE ABOUT AS

3 IT IS CONDUCTED OBJECTIVELY
4 AUDITORS ASCERTAIN THE DEGREE OF CORRESPONDENCE BETW
5 AUDITORS COMMUNICATE THE AUDIT RESULTS TO VARIOUS INT

TYPES OF AUDITS
1. FINANCIAL AUDIT
2.COMPLIANCE AUDIT
3.OPERATIONA AUDIT

1. FINANCIAL AUDIT
THIS IS AN AUDIT CONDUCTED TO DETERMINE WHETHER THE F
PRESENTED IN ACCORDANCE WITH AN IDENTIFIED FINANCIAL R

2.COMPLIANCE AUDIT
INVOLVES A REVIEW OF N ORGANIZATION'S PROCEDURES TO DE
HAS ADHERED TO SPECIFIC PROCEDURES, RULES AND REGULATI
IT'S CRITERIA IS DEPENDENT ON THE CRITERIA ESTABLISHED BY

3.OPERATIONA AUDIT
IS A STUDY A SPECIFIC UNIT OF AN ORGANIZATION FOR THE PUR
THE MAIN PURPOSE IS TO ASSESS THE COMPANY'S PERFORMAN
IT IS ALSO KNOWN AS PERFORMACE AUDIT OR MANAGEMENT A

TYPES OF AUDITORS

A.EXTERNAL AUDITORS
B.INTERNAL AUDITORS
C. GOVERNMENT AUDITORS

A.EXTERNAL AUDITORS
THESE ARE INDEPENDENT CPAS WHO OFFER THEIR PROFESSIONAL SERVICES TO DIFFERENT CLIENTS ON A CON
THEY ARE THE ONES WHO GENERALLY PERFORM THE FINANCIAL AUDIT

B.INTERNAL AUDITORS
ARE ENTITY'S OWN EMPLOYEES WHO INVESTIGATE AND APPRAISE TO EFFECTIVENESS ANS EFFICIENCY OF OPER

C. GOVERNMENT AUDITORS
THESE ARE GOVERNMENT EMPLOYEES WHOSE MAIN CONCERN IS TO DETERMINE WHETHER PERSONS OR ENTI
WITH GOVERNMENT LAWS AND REGULATIONS.
THEY USUALLY CONDUCT COMPLIANCE AUDIT.

COMPARISON AMONG DIFFERENT TYPE

FINANCIAL AUDIT
THAT THE FINANCIAL
STATEMENT ARE
ASSERTIONS MADE BY AUDITEE
FAIRLY STATED

FINANCIAL REPORTING STANDARDS

AND OTHER FINANCIAL REPORTING
ESTABLISHED CRITERIA
FRAMEWORK

AN OPINION ABOUT WHETHER THE

FINANCIAL STATEMENTS ARE
CONTENTS OF THE AUDITORS REPORT FAIRLY PRESENTED IN CONFORMITY
WITH AN IDENTIFIED FINANCIAL
REPORTING FRAMEWORK
AUDITORS WHO GENERALLY PERFORM
EXTERNAL AUDITORS

THE INDEPENDENT FINANCIAL AUDIT

ITS OBJECTIVE IS TO ENABLE THE AUDITOR TO EXPRESS WHETHER FINANCIAL STATEMENTS ARE PREPARED, IN A
RESPECTS, IN ACCORDANCE WITH AN IDENTIFIED FINANCIAL REPORTING FRAMEWORK OR ACCEPTABLE REPOR

MANAGEMENT
IS THE RESPONSIBLE FOR PREPARING AND PRESENTING THE FINANCIAL STATEMENTS INA COORDANCE WITH T
REPORTING FRAMEWORK.

ASSURANCE PROVIDED BY AUDITORS

IS A "REASONABLE ASSURANCE" (NOT ABSOLUTE ASSURANCE)
THIS IS BECAUSE THERE ALWAYS "INHERENT LIMITATIONS"

LIMITATIONS:
1. THE USE OF TESTING/SAMPLING RISK
2.ERROR OF APPLICATION OF JUDGMENT/NON SAMPLING RISK
3.RELIANCE ON MANAGEMENT'S REPRESENTATION
4.LIMITATIONS OF THE CLIENT'S ACCOUNTING AND INTERNAL CONTROL SYSTEM
5.NATURE OF EVIDENCE -IT IS GENERALLY PERSUASIVE RATHER THAN CONCLUSIVE

GENERAL PRINCIPLES GOVERNING THE AUDIT OF FINANCIAL STATEMENTS

1.THE AUDITOR SHOULD COMPLY WITH THE CODE OF PROFESSIONAL ETHICS FOR CPA PROMULGATED BY BOA

2. THE AUDITOR SHOULD CONDUCT AN AUDITIN ACCORDANCE WITH PHILIPPINE STANDARDS ON AUDTING.

3.THE AUDITOR SHOULD PLAN AND PERFORM THE AUDIT WITH AN ATTITUDE OF PROFESSIONAL SKEPTICISM.

REASONS WHY IT IS NEED TO HAVE AN INDEPENDENT FINANCIAL STATEMENT AUDIT

1.CONFLICT OF INTEREST BETWEEN MANAGEMENT AND USERS OF FINANCIAL STATEMENTS
2.EXPERTISE
3.REMOTENESS
4.FINANCIAL CONSEQUENCES

THEORETICAL FRAMEWORK OF AUDITING

1.AUDIT FUNCTION OPERATES ON THE ASSUMPTION THAT ALL FINANCIAL DATA VERIFIABLE.
2.THE AUDITOR SHOULD ALWAYS MAINTAIN INDEPENDENCE WHO RESPECT TO THE FINANCIAL STATEMENTS U
3.THERE SHOULD BE NO LONG TERM CONFLICT BETWEEN THE AUDITOR AND THE CLIENT MANAGEMENT.
4.EFFECTIVE INTERNAL CONTROL SYSTEM REDUCES THE POSSIBILITY OF ERRORS AND FRAUD AFFECTING THE F
5.CONSISTENT APPLICATION OF GAAP OR PFRS RESULTS INFAIR PRESENTATION OF FINANCIAL STATEMENTS.
6.WHAT WAS HELD TRUE IN THE PAST WILL CONTINUE TO BOLD TRUE IN THE FUTURE IN THE ABSENCE OF KNO
7.AN AUDIT BENEFITS THE PUBLIC
BY MEANS OF AN ORDERED STRUCTURED SERIES OF STEPS.
D EVALUATING EVIDENCE ABOUT ASSERTIONS REGARDING ECONOMIC ACTIONS AND EVENTS
ASSERTIONS- ARE REPRESENTATIONS MADE BY AN AUDITEE ABOUT ECONOMIC ACTIONS AND EVENTS.
THE AUDITO'S OBEJECTIVE IS TO DETERMINE WHETHER THESE ASSERTIONS

DEGREE OF CORRESPONDENCE BETWEEN ASSERTIONS AND ESTABLISHED CRITERIA.

THE AUDIT RESULTS TO VARIOUS INTERESTED USERS.

ED TO DETERMINE WHETHER THE FINANCIAL STATEMENTS OF AN ENTITY ARE FAIRLY

E WITH AN IDENTIFIED FINANCIAL REPORTING FRAMEWORK.

RGANIZATION'S PROCEDURES TO DETERMINE WHETHER ORGANIZATION

PROCEDURES, RULES AND REGULATIONS.
ON THE CRITERIA ESTABLISHED BY AN AUTHORITATIVE BODY(EX. BIR).

OF AN ORGANIZATION FOR THE PURPOSE OF MEASURING ITS PERFORMANCE.

SSESS THE COMPANY'S PERFORMANCE AND MAKE RECOMMENDATIONS FOR IMPROVEMENT.
ORMACE AUDIT OR MANAGEMENT AUDIT.

S TO DIFFERENT CLIENTS ON A CONTRACTUAL BASIS.

CTIVENESS ANS EFFICIENCY OF OPERATIONS AND INTERNAL CONTROLS.

RMINE WHETHER PERSONS OR ENTITIES COMPLY

PARISON AMONG DIFFERENT TYPES OF AUDIT

COMPLIANCE AUDIT OPERATIONA AUDIT
THAT THE ORGANICZATION HAS COMPLIED THW ORGANIZATION'S ACTIVITIES
WITH LAWS, REGULATIONS OR CONTRACTS ARE CONDUCTED EFFECTIVELY AND EFFICIENTLY

LAWS, REGULATIONS AND CONRACTS OBJECTIVES SET BY THE BOARD OF DIRECTORS

REPORTS ON THE DEGREE OF RECOMMENDATION OR SUGGESTIONS ON HOW

COMPLIANCE WITH APPLICABLE LAWS TO IMPROVE OPERATIONS.
AND CONTRACTS

GOVERNMENT AUDITORS INTERNAL AUDITORS

AL STATEMENTS ARE PREPARED, IN ALL MATERIAL

RAMEWORK OR ACCEPTABLE REPORTING STANDARDS.

TEMENTS INA COORDANCE WITH THE FINANCIAL

CS FOR CPA PROMULGATED BY BOARD OF ACCOUNTANCY

PPINE STANDARDS ON AUDTING.

DE OF PROFESSIONAL SKEPTICISM.

IAL STATEMENTS

DATA VERIFIABLE.
T TO THE FINANCIAL STATEMENTS UNDER AUDIT.
ND THE CLIENT MANAGEMENT.
RORS AND FRAUD AFFECTING THE FINANCIAL STATEMENTS
ION OF FINANCIAL STATEMENTS.
HE FUTURE IN THE ABSENCE OF KNOWN CONDITIONS TO THE CONTRARY.
HETHER THESE ASSERTIONS ARE VALID
STANDARDS -ARE ESTABLISHED TO MEASURE THE QUALITY OF PERFORMANCE OF INDIVIDUALS AND OR

GENERALLY ACCEPTED AUDITING STANDARDS (GAAS)

TEN GAAS
GENERAL STANDARDS
TECHNICAL TRAINING AND
PROFICIENCY

INDEPENDENCE

PROFESSIONAL CARE

AUDITING AND ASSURANCE STANDARDS COUNCIL (AASC)

HAS GIVEN THE TASK TO PROMULGATE AUDITING STANDARDS, PRACTICE AND PROCEDURES WHICH SH

AASC PRONOUNCEMENTS
FRAMEWORK FOR ASSURANCE ENGAGEMENTS
1.AUDIT
*PHILIPPINE STANDARDS ON AUDITING
PSAS 100-9999
*PHIL. AUDITING PRACTICE STATEMENTS
PAPSS 1000-1999

2.REVIEW
*PHILIPPINE STANDARDS ON REVIEW
ENGAGEMENT
*PSRES 2000-2699

3.OTHER ASSURANCE ENGAGEMENTS

*PHILIPPINE STANDARDS ON ASSURANCE
ENGAGEMENTS
*PSAFS 3000-3699
*PHIL. ASSURANCE
ENGAGEMENT PRACTICE
STATEMENTS
PAPEPS 3700-3999

QUALITY CONTROL
ARE POLICIES AND PROCEDURES ADOPTED BY CPAS TO PROVIDE REASONABLE ASSURANCE OF CONFORM
WITH PROFESSIONAL STANDARDS IN PERFORMING AUDIT AND RELATED SERVICES

PHILIPPINE STANDARDS ON QUALITY CONTROL (PSQC 1)

HAS AN OBLIGATION TO ESTABLISH A SYSTEM QUALITY CONTROL DESIGNED TO PROVIDE IT
WITH REASONABLE ASSURANCE THAT THE FIRM AND ITS PERSONNEL COMPLY WITH RPOFESSIONAL STA
AND REGULATORY AND LEGAL REQUIREMENTS, AND THAT THE REPORT ISSUED BY THE FIRM ARE APPR

ELEMENTS OF QUALITY CONTROL

A.LEADERSHIP RESPONSIBILITIES FOR QUALITY ON AUDITS

*ENGAGEMENT PARTNER SHOULD TAKE RESPONSIBILITY FOR THE OVERALL ON EACH AUDIT ENGAGEME
THE PARTNER IS ASSIGNED.

B.ETHICAL REQUIREMENTS
*INTEGRITY
*OBJECTIVITY
*PROFESSIONAL COMPETENCE AND DUE CARE
*CONFIDENTIALITY
*PROFESSIONAL BEHAVIOUR

C.INDEPENDENCE
ENGAGEMENT PARTNER SHOULD:
*OBTAIN RELEVANT INFORMATION TO IDENTIFY CIRCUMSTANCES AND RELATIONSHIPS THAT CREATE T
*EVALUATE INFORMATION ON IDDENTIFIED BREACHES TO DETERMINE WHETHER THEY CREATE THREAT
*TAKE APPROPRIATE SAFEGUARDS TO ELIMINATE SUCH THREATS OR REDUCE THEM TO AN ACCEPTABLE
*DOCUMENT CONCLUSIONS ON INDEPENDENCE AND THE BASIS FOR SUCH CONCLUSION.

D.ACCEPTANCE AND CONTINUANCE OF CLIENT RELATIONSHIPS

*HAS CONSIDERED THE INTEGRITY OF THE CLIENT
*IS COMPETENT TO PERFORM THE ENGAGEMENT AND HAS THE CAPABILITIES
,TIME AND RESOUCER
*CAN COMPLY ETHICAL REQUIREMENTS

E.HUMAN RESOURCES AND ASSIGNMENT

*RECRUITMENT
*PERFORMANCE EVALUATION
*CAPABILITIES AND COMPETENCE
*CAREER DEVELOPMENT
*ASSIGNMENT OF ENGAGEMENT TEAMS

F.ENGAGEMENT PERFORMANCE
*THAT ENGAGEMENT ARE PERFORMED IN ACCORDANCE WITH PROFESSIONAL STANDARDS AND OTHER
REGULATORY REQUIREMENTS
*THE AUDIT REPORT ISSUED IS APPROPRIATE IN THE CIRCUMSTANCES.
THE ENGAGEMENT PARTNER SHOULD TAKE A RESPONSIBILITY ON THE FF:
A.DIRECTION- ASSISTANTS SHOULD BE INFORMED OF THEIR RESPONSIBILITIES, NATURE OF THE ENTITY A
B.SUPERVSION-MONITORING THE PROGRESS OF AUDIT
C.REVIEW
D.CONSULTATION -ENCOURAGE FIRM PERSONNEL TO SEEK AUTHORITATIVE SOURCES WITHIN OR OUTS

ENGAGEMENT QUALITY CONTROL REVIEW

THIS REQUIRES THE ENGAGEMENT PARTNER:
A.TO DETERMINE THAT AN ENGAGEMENT QUALITY REVIEWER HAS BEEN APPOINTED.
B. TO DISCUSS SIGNIFICANT MATTERS ARISING DURING THE AUDIT ENGAGENMENT.
C.NOT TO ISSUE THE AUDITOR'S REPORT UNTIL THE COMPLETION OF THE ENGAGEMENT QUALITY CONT

DIFFERENCES OF OPINION
THE ENGAGEMENT PARTNER SHOULD INFORM THE MEMBERS OF THE ENGAGEMENT TEAM TO BRING M
DIFFERENCES OF OPINION TO THE ATTENTION OF THE ENGAGEMENT PARTNER OR OTHERS WITHIN THE
FEAR OF REPRISALS. THE AUDIT REPORT SHOULD NOT BE ISSUED UNTIL THE MATTER INVOLVING DIFFER

QUALITY CONTROL REVIEW

THE GOVERNMENT THRU THE PHILIPPINE REGULATORY BOARD OF ACCOUNTANCY

REQUIRES THE CPAS IN PUBLIC PRACTICE TO OBTAIN CERTIFICATE OF ACCREDITATION VALID FOR 3 YEAR
REQUIREMENTS.

THE PRC HAS CREATED A QUALITY REVIEW COMMITTEE (QRC) WHICH SHALL CONDUCT A QUALITY REVIE
TO PRACTICE PUBLIC ACCOUNTANCYAND SHALL RECOMMEND THE RREVOCATION OF THE CERTIFICATE
OF CPAS WHO HAVE NOT OBSERVED THE QUALITY CONTROL MEASURES.
RE THE QUALITY OF PERFORMANCE OF INDIVIDUALS AND ORGANIZATIONS.

REPRESENT MEASURES OF THE QUALITY OF THE AUDITOR'S PERFORMANCE.

THESE SHOULD BE LOOKED AS A MINIMUM STANDARD OF PERFORMANCE THAT THE AUDITORS SHOULD FOLLOW

TEN GAAS
STANDARDS OF FIEDWORK STANDARDS OF REPORTING
PLANNING GAAP

INTERNAL CONTROL INCONSISTENCY

CONSIDDERATION DISCLOSURE
EVIDENTIAL MATTER OPINION

OUNCIL (AASC)
DITING STANDARDS, PRACTICE AND PROCEDURES WHICH SHALL BE ACCEPTED.

C PRONOUNCEMENTS
RELATED SERVICES
1.AGREED UPON PROCEDURES
*PHIL. STANDARDS ON RELATED SERVICES
PSRSS 4000-4699
* PHIL. RELATED SERVICES PRACTICE
STATEMENTS
PRSPS 4700-4999

2.COMPILATION ENGAGEMENT
*PHIL. STANDARDS ON RELATED SERVICES
PSRSS 4000-4699
* PHIL. RELATED SERVICES PRACTICE
STATEMENTS
PRSPS 4700-4999
 BY CPAS TO PROVIDE REASONABLE ASSURANCE OF CONFORMING
ORMING AUDIT AND RELATED SERVICES

ROL (PSQC 1)
EM QUALITY CONTROL DESIGNED TO PROVIDE IT
FIRM AND ITS PERSONNEL COMPLY WITH RPOFESSIONAL STANDARDS
ENTS, AND THAT THE REPORT ISSUED BY THE FIRM ARE APPROPRIATE.

LITY ON AUDITS
SPONSIBILITY FOR THE OVERALL ON EACH AUDIT ENGAGEMENT TO WHICH

NTIFY CIRCUMSTANCES AND RELATIONSHIPS THAT CREATE THREATS TO INDEPENDENCE.

D BREACHES TO DETERMINE WHETHER THEY CREATE THREAT TO INDEPENDENCE
MINATE SUCH THREATS OR REDUCE THEM TO AN ACCEPTABLE LEVEL
ENCE AND THE BASIS FOR SUCH CONCLUSION.

ENT RELATIONSHIPS

EMENT AND HAS THE CAPABILITIES

ACCORDANCE WITH PROFESSIONAL STANDARDS AND OTHER

TE IN THE CIRCUMSTANCES.
E A RESPONSIBILITY ON THE FF:
ORMED OF THEIR RESPONSIBILITIES, NATURE OF THE ENTITY AND POTENTIAL PROBLEMS THAT ARISE
SS OF AUDIT

ONNEL TO SEEK AUTHORITATIVE SOURCES WITHIN OR OUTSIDE THE FIRM

QUALITY REVIEWER HAS BEEN APPOINTED.

ING DURING THE AUDIT ENGAGENMENT.
NTIL THE COMPLETION OF THE ENGAGEMENT QUALITY CONTROL REVIEW.

ORM THE MEMBERS OF THE ENGAGEMENT TEAM TO BRING MATTERS INVOLVING

ON OF THE ENGAGEMENT PARTNER OR OTHERS WITHIN THE FIRM AS APPROPRIATE WITHOUT
OULD NOT BE ISSUED UNTIL THE MATTER INVOLVING DIFFERENCES OF OPINION IS RESOLVED.

EGULATORY BOARD OF ACCOUNTANCY

O OBTAIN CERTIFICATE OF ACCREDITATION VALID FOR 3 YEARS AND CAN BE RENEWED AFTER COMPLYING

COMMITTEE (QRC) WHICH SHALL CONDUCT A QUALITY REVIEW ON THE APPLICANTS

HALL RECOMMEND THE RREVOCATION OF THE CERTIFICATE OF REGISTRATIONS
UALITY CONTROL MEASURES.
THE AUDITOR'S REPONSIBILITY
IS TO DESIGN THE AUDIT TO PROVIDE REASONABLE ASSURANCE OF DETECTING MATERIAL MISSTATEME
THESE STATEMENTS MAY EMANATE:
1.ERROR
2.FRAUD
3.NONCOMPLIANCE WITH LAWS AND REGULATIONS

1.ERROR REFERS TO UNINTENTIONAL MISSTATEMENTS

*MATHEMATICAL OR CLERICAL MISTAKES
*INCORRECT ACCOUNTING ESTIMATE ARISING FROM OVERSIGHT OR MISINTERPRETATION
*MISTAKE IN THE APPLICATION OF ACCOUNTING POLICIES.

2.FRAUD INBTENTIONAL ACT THAT CAUSED THE MISSTATEMENT OF FINANCIAL STATEMENT.

TYPES OF FRAUD
1. FRAUDULENT FINANCIAL REPORTING
*MANIPULATION, FALSIFICATION, OR ALTERATION OR RECORDS OR DOCUMENTS
*MISINTERPRETATION IN OR INTENTIONAL OMISSION OF A CERTAIN TRANSACTIONS.
*RECORDING OF TRANSACTIONS WITHOUT SUBSTANCE
*INTENTIONAL MISAPPLICATION OF ACCOUNTING POLICIES.

2.MISAPPROPRIATION OF ASSETS OR EMPLOYEE FRAUD

INVOLVES THEFT
*EMBEZZLING RECEIPTS
*STEALING ASSTES SUCH AS CASH, MARKETABLE SECURITIES AND INVENTORY
*LAPPING OF ACCOUNTS RECEIVABLE

RESPONSIBILITY OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE

A.MANAGEMENT
TO ESTABLISH A CONTROL ENVIRONMENT AND TO IMPLEMENT INTERNAL CONTROL POLICIES AND PRO
DESIGNED TO ENSURE AMONG OTHERS, THE DETECTION AND PREVENTION OF FRAUD AND ERROR.

B.INDIVIDUALS CHARGED WITH GOVERNANCE FO AN ENTITY

TO ENSURE THE INTEGRITY OF THE ENTITY'S ACCOUNTING AND FINANCIAL REPORTING SYSTEMS AND TH
APPROPRIATE CONTROLS ARE IN PLACE.

C.AUDITOR'S RESPONSIBILITY
DESIGN THE AUDIT TO OBTAIN REASONABLE ASSURANCE THAT THE FINANCIAL STATEMENTS ARE
FREE FROM MATERIAL MISSTATEMENTS WHETHER CAUSED BY ERROR OR FRAUD.
PLANNING PHASE
*THE AUDITOR SHOULD MAKE INQUIRIES OF MANAGEMENT ABOUT POSSIBLE ERRORS AND FRAUD.
*SHOULD ASSESS THE RISK
*FRAUD RISK FACTORS- DO NOT NECESSARILY INDICATE THE EXISTENCE OF FRAUD.
HOWEVER, THEY OFTEN HAVE BEEN PRESENT IN CIRCUMSTANCES WHERE FRAUDS OCCURRED.

TESTING PHASE
THE AUDITOR SOULD PERFORM PROCEDURES NECESSARY TO DETERMINE WHETHER MATERIAL MISTAT

AFTER IDENTIFYING THAT THE EFFECT OF FRAUD IS NOT MATERIAL, AUDITOR MAY
*REFER THE MATTER TO THE APPROPRIATE LEVEL OF MANAGEMENT AT LEAST ONE LEVEL ABOVE THOS
* BE STATISFIED THAT, GIVEN THE POSITION OF THE LIKELY PERPETRATOR, THE FRAUD HAS NO OTHER P

IF THE AUDITOR DETECTS FRAUD AND UNABLE TO EVALUATE WHETHER THE STATEMENT IS MATERIAL O
THE AUDITOR SHOULD:
*CONSIDER IMPLICATION FOR OTHER ASPECTS OF AUDIT, PRIMARILY THE RELIABILITY OF MANAGEMEN
* DUSCUSS THE MATTER AND THE APPROACH TO FURTHER INVESTGATION WITH AN APPROPRIATE LEVE
* ATTEMPT TO OBTAIN EVIDENCE TO DETERMINE WHETHER A MATERIAL FRAUD IN AFCT EXISTS
*SUGGEST THAT THE CLIENT CONSULT WITH LEGAL COUNSEL ABOUT QUESTIONS OF LAW.

COMPLETION PHASE
THE AUDITOR SHOULD OBTAIN A WRITTEN REPRESENTATION FROM THE CLIENT'S MANAGEMENT THAT
*IT ACKNOWLEDGED ITS RESPONSIBILITY FOR THE IMPLEMENTATION AND OPERATIONS OF ACCOUNTIN
SYSTEMS THAT ARE DESIGNED TO PREVENT AND DETECT FRAUD AND ERROR.
*IT BELIEVES THE EFFECTS OF THOSE UNCORRECTED FINANCIAL MISSTATEMENTS AGGREGATED BY THE
DURING THE AUDIT ARE IMMATERIAL. A SUMMARY OS SUCH SHOULD BE INCLUDED OR ATTACHED TO T
*IT HAS DISCLOSED TO THE AUDITOR ALL SIGNIFICANT FACTS RELATING TO ANY FRAUDS OR SUSPECTED
*IT HAS DISCLOSED TO THE AUDITOR THE RESULTS OF ITS ASSESSMENT OF THE RISK THAT THE FINANCIA
OF FRAUD.

CONSIDER THE EFFECT ON THE AUDITOR'S REPORT

WHEN THE AUDITOR BELIEVES THAT MATERIAL ERROR OR FRAUD EXISTS, HE SHOULD REQUEST THE MA
THE FINANCIAL STATEMENTS.
IF THE AUDITOR IS UNABLE TO EVALUATE THE EFFECT OF FRAUD ON FINANCIAL STATEMENTS BECAUSE
AUDITOR'S EXANINATION, THE AUDITOR SHOULD EITHER QUALIFY OR DISCLAIM HIS OPINION ON THE F

NONCOMPLIANCE WITH LAWS AND REGULATIONS

NONCOMPLIANCE -REFERS TO ACTS OF OMISSION BY THE ENTITY BEING AUDITED, EITHER INTENTIONAL
ARE CONTRARY TO THE PREVAILING LAWS OR REGULATIONS.

EX. TAX EVASION

VILATION OF ENVIRONMENTAL PROTECTION LAWS
INSIDE TRADING OF SECURITIES

MANAGEMENT'S RESPONSIBILITY- TO ENSURE ENTITY'S OPERATIONS ARE CONDUCTED IN ACCORDAN

AUDITOR'S RESPONSIBILITY
PALNNING PHASE
*OBTAIN GENERAL UNDERSTANDING OF THE LEGAL AND THE REGULATORY FRAMEWORK
*DESIGN PROCEDURES TO HELP DENTIFY INSTANCES OF NONCOMPLIANCE

TESTING PHASE
* EVALUATE THE POSSIBLE EFFECT ON THE FINANCIAL STATEMENTS.
*WHEN THE AUDITOR BELIEVES THERE MAY BE NONCOMPLANCE, THE AUDITOR SHOULD DOCUMENT
THE FINDINGS, DISCUSS THEM WITH MANAGEMENT, AND CONSIDER THE IMPLICATION ON OTHER ASPE

COMPLETION PHASE
THE AUDITOR SHOULD OBTAIN WRITTEN REPRESENTATIONS THAT MANAGEMENT HAS DISCLOSED
TO THE AUDITOR ALL KNOWN ACTUAL OR POSSIBLE NONCOMPLIANCE WITH LAWS AND REGULATIONS
MATERIALLY AFFECT THE FINANCIAL STATEMENTS

CONSIDER THE EFFECT ON THE AUDITOR'S REPORT

WHEN THE AUDITOR BELIEVES THAT THERE IS NONCOMPLIANCE WITH LAWS AND REGULATIONS THAT M
HE SHOULD REQUEST THE MANAGEMENT TO REVISE THE FINANCIAL STATEMENTS, HE SHOULD REQUES
OTHERWISE, A QUALIFIED OR ADVERSE OPINION WILL BE ISSUED.

IF A SCOPE LIMITATION HAS PRECULDED THE AUDITOR FROM OBTAINING SUFFICIENT APPROPRIATE EVI
EVALUATE THE EFFECT OF NONCOMPLIANCE WITH LAWS REGULATIONS, THE AUDITOR SHOULD EXPRES
A DISCLAIMER OF OPINION.

3 CATEGORIES OF FRAUD RISK FACTORS RELATING TO MISSTATEMENTS RESULTING FROM FRAUDULEN

1.MANAGEMENT'S CHARACTERISTICS AND INFLUENCE OVER THE CONTROL ENVIRONMENT
2. INDUSTRY CONDITIONS
3. OPERATING CHARACTERISTICS AND FINANCIAL STABILITY

2 CATEGORIES OF FRAUD RISK FACTORS RELATING TO MISSTATEMENTS RESULTING FROM MISAPPROP

1. SUSCEPTIBILITY OF ASSETS TO MISAPPROPRIATION
2.CONTROLS

1. SUSCEPTIBILITY OF ASSETS TO MISAPPROPRIATION

SUSCEPTIBLE TO THEFT:
A.LARGE AMOUNT OF CASH
B.INVENTORY CHARATERISTICS, SUCH AS SMALL SIZE COMBINED WITH HIGH VALUE AND HIGH DEMAND
C.EASILY CONVERTIBLE ASSETS, SUCH AS BEARER BONDS, DIAMONDS OR COMPUTER CHIPS.
D.FIXED ASSET CHARACTERISTICS

2.FRAUD RISKS RELATING TO CONTROLS

A. LACK OF APPROPRIATE MANAGEMENT OVERSIGHT (EX. INADEQUATE SUPERVISION OR INADEQUATE
B.LACK OF PROCEDURES TO SCREEN JOB APPLICANTS FOR POSITIONS WHERE EMPLOYEES HAVE ACCESS
C.INADEQUATE RECORD KEEPING FOR ASSETS SUSSCEPTIBLE TO MISAPPROPRIATION.
D.LACK OF APPROPRIATE SEGREGATION OF DUTIES OR INDEPENDENT CHECKS.
E.LACK OF AN APPROPRIATE SYSTEM OF AUTHORIZATION AND APPROVAL OF TRANSACTIONS (FOR EXAM
F.POOR PHYSICAL SAFEGUARDS OVER CASH, IBVESTMENTS INVENTORY OR FIXED ASSETS.
G.LACK OF TIMELY AND APPROPRIATE DOCUMENTATION FOR TRANSACTIONS (EX. CFEDITS FOR MERCH
H.LACK OF MANDATORY VACATIONS FOR EMPLOYEES PERFORMING KEY CONTROL FUNCTIONS.
 TING MATERIAL MISSTATEMENTS IN THE FINANCIAL STATEMENTS.

NTERPRETATION

ANCIAL STATEMENT.

CONTROL POLICIES AND PROCEDURES

N OF FRAUD AND ERROR.

L REPORTING SYSTEMS AND THAT

NCIAL STATEMENTS ARE

IBLE ERRORS AND FRAUD.

FRAUDS OCCURRED.

WHETHER MATERIAL MISTATEMENTS EXIST.

EAST ONE LEVEL ABOVE THOSE INVOLVED.

THE FRAUD HAS NO OTHER PERPETRATORS.

HE STATEMENT IS MATERIAL OR IMMATERIAL,

RELIABILITY OF MANAGEMENT REPRESENTATIONS.

N WITH AN APPROPRIATE LEVEL AT LEAST ONE LEVEL ABOVE THOSE INVOLVED.
FRAUD IN AFCT EXISTS
STIONS OF LAW.

CLIENT'S MANAGEMENT THAT:

OPERATIONS OF ACCOUNTING AND INTERNAL CONTROL

MENTS AGGREGATED BY THE AUDITOR

NCLUDED OR ATTACHED TO THE WRITTEN REPRESENTATION.
O ANY FRAUDS OR SUSPECTEDS KNOWN TO MANAGEMENT THAT MAY HAVE AFFECTED THE ENTITY.
F THE RISK THAT THE FINANCIAL STATEMENTS MAY BE MATERIALLY MISSTATED AS A RESULT

HE SHOULD REQUEST THE MANAGEMENT TO REVISE

NCIAL STATEMENTS BECAUSE OF A LIMITATION ON THE SCOPE OF THE

CLAIM HIS OPINION ON THE FINANCIAL STATEMENTS.

UDITED, EITHER INTENTIONAL OR UNINTENTIONAL, WHICH

E CONDUCTED IN ACCORDANCE WITH LAWS AND REGULATIONS.

Y FRAMEWORK

DITOR SHOULD DOCUMENT

IMPLICATION ON OTHER ASPECTS OF THE AUDIT.

GEMENT HAS DISCLOSED

TH LAWS AND REGULATIONS THAT COULD

WS AND REGULATIONS THAT MATERIALLY AFFECTS THE FINANCIAL STATEMENTS,

EMENTS, HE SHOULD REQUEST THE MANAGEMENT TO REVISE THE FINANCIAL STATEMENTS2E.

SUFFICIENT APPROPRIATE EVIDENCE TO

HE AUDITOR SHOULD EXPRESS A QUALIFIED OPINION OR

RESULTING FROM FRAUDULENT FINANCIAL REPORTING:

L ENVIRONMENT

RESULTING FROM MISAPPROPRIATION OF ASSETS:

GH VALUE AND HIGH DEMAND

COMPUTER CHIPS.
UPERVISION OR INADEQUATE MONITORING OF REMOTE LOCATIONS)
ERE EMPLOYEES HAVE ACCESS TO ASSETS SUSCEPTIBLE TO MISAPPROPRIATION.
OPRIATION.

OF TRANSACTIONS (FOR EXAMPLE, IN PURCHASING)

R FIXED ASSETS.
ONS (EX. CFEDITS FOR MERCHANDISE RETURNS)
ONTROL FUNCTIONS.
GENERAL APPROACH WHEN AUDITING FINANCIAL STATEMENTS

FINANCIAL STATEMENTS ASSERTIONS

A. EXISTENCE OR OCCURRENCE
B. RIGHTS AND OBLIGATIONS
C.COMPLETENESS
D.VALUATION AND ALLOCATION
E. PRESENTAION AND DISCLOSURE

CATEGORIES OF ASSETIONS:
A. ASSERTIONS ABOUT CLASSES OF TRANSACTIONS AND EVENTS:

*OCCURRENCE- TRANSACTIONS THAT HAVE BEEN RECORDED HAVE OCCURRED AND PERTAIN TO TH
*COMPLETENESS -ALL TRANSACTIONS AND EVENTS THAT SHOULD HAVE BEEN RECORDED HAVE BEE
*ACCURACY -AMOUNTS AND OTHER DATA RELATING TO RECORDED TRANSACTIONS AND EVENTS HA
*CUTOFF -TRANSACTIONS AND EVENTS HAVE BEEN RECORDED IN THE CORRECT ACCOUNTING PERIO
*CLASSIFICATION -TRANSACTIONS AND EVENTS HAVE BEEN RECORDED IN THE PROPER ACCOUNTS.

B.ASSERTIONS ABOUT THE ACCOUNT BALANCES AT THE PERIOD END:

*EXISTENCE -ASSETS, LIABILITIES, AND EQUITY INTERESTS EXIST.

*RIGHTS AND OBLIGATIONS - THE ENTITY HOLDS OR CONTROLS THE RIGHTS TO ASSETS, AND LIABILI
*COMPLETENESS -ALL ASSETS, LIABILITIES AND EQUITY INTERESTS THAT SHOULD HAVE BEEN RECOR
*VALUATION AND ALLOCATION- ASSETS, LIABILITIES AND EQUITY INTERESTS ARE INCLUDED IN THE
APPRPRIATE AMOUNTSAND ANY VALUATION AND ALLOCATION ARE RECORDED APPROPRIATELY.

C.ASSERTIONS ABOUT PRESENTATION AND DISCLOSURE:

*OOCURRENCE AND RIGHTS AND OBLIGATIONS- DISCLOSED EVENTS, TRANSACTIONS, AND OTHER M
*COMPLETENESS -ALL DISCLOSURES THAT SHOULD HAVE BEEN INCLUDED IN THE FINANCIAL STATEM
*CLASSIFICATION AND UNDERSTANDABILITY - FINANCIAL INFORMATION IS APPROPRIATELY PRESEN
*ACCURACY AND VALUATION -FINANCIAL AND OTHER INFORMATION ARE DISCLOSEDFAIRLY AND AT

AUDIT PROCEDURES
ASSERTIONS ARE USED AS THE BASIS FOR THE ASSESSMENT OF RISKS OF MATERIAL MISSTATEMENT
RPOCEDURES.
THE PROCEDURES SELECTED SHOULD ENABLE THE AUDITOR TO GATHER SUFFICIENT APPROPRIATE E

SOME OF THE AUDIT PROCEDURES INCLUDE THE FOLLOWING:

A.INSPECTION- INVOLVES EAMINING OF RECORDS, DOCUMENTS OR TANGIBLE ASSETS.

B.OBSERVATION -CONSISTS OF LOOKING AT THE PROCESS OR PROCEDURE BEING PERFORMED BY OT
C.INQUIRY -CONSISTS OF SEEKING INFORMATIONFROM KNOWLEDGEABLE PERSONS INSIDE OR OUT
D.CONFIRMATION - CONSISTS OF THE RESPONSE TO AN INQUIRY TO CORROBORATE INFORMATION
E.COMPUTATION -CONSISTS OF CHECKING THE ARITHMETICAL ACCURACY OF SOURCE DOCUMENTS
F.ANALYTICAL PROCEDURES - CONSIST OF THE ANALYSIS OF SIGNINFICANT RETIOS AND TRENDS INC
FLUCTUATIONS AND RELATIONSHIPS THAT ARE INCONSISTENTWITH OTHER RELEVANTINFORMATION

AUDIT EVIDENCE
REFERS TO THE INFORMATION OBTAINED BY THE AUDITORIN ARRIVING AT THE CONCLUSIONS IN W

THE AUDIT PROCESS

1.ACCEPTING AN ENGAGEMENT
2.AUDIT PLANNING
3.CONSIDERING INTERNAL CONTROL
4.PERFORMING SUBTANTIVE TEST
5.COMPLETING THE AUDIT
6.ISSUING A REPORT

1.ACCEPTING AN ENGAGEMENT
1ST STEP IS TO DECIDE WHETHER TO ACCEPT OR REJECT AN AUDIT ENGAGEMENT.
PRELIMINARY PLANNING ACTIVITIES. THESE PROCEDURES INCLUDE:
A.PERFORMING PROCEDURES REGARDING THE CONTINUANCE OF THE CLIENT RELATIONSHIP AND T
B.EVALUATING COMPLIANCE WITH ETHICAL REQUIREMENTS, INCLUDING INDEPENDENCE.
C.ESTABLISHING AN UNDERSTANDING OF THE TERMS OF THE ENGAGEMENT.

2.AUDIT PLANNING
THE AUDITOR OBTAINS MORE DETAILED KNOWLEDGE ABOUT THE CLIENT'S BUSINESS AND INDUSTR
A PRELIMINARY ASSESSMENT OF RISK AND MATERIALITY SHOULD ALSO BE MADE TO BE ABLE TO DE

3.CONSIDERING INTERNAL CONTROL

INVOLVES OBTAINING UNDERSTANDING OF THE ENTITY'S CONTROL SYSTEMS ASSESSING THE LEVEL

4.PERFORMING SUBTANTIVE TEST

THESE PROCEDURE S WOULD INVOLVE EXAMINATION OF THE DOCUMENTS AND EVIDENCE SUPPOR
IN THE FINANCIAL STATEMENT.
IT IS HIGHLY DEPENDENT ON THE RESULTS OF THE AUDITOR'S CONSIDERATION OF INTERNAL CONTR

5.COMPLETING THE AUDIT

THE AUDITOR MUST HAVE SUFFICIENT APPROPRIATE EVIDENCE IN ORDER TO REACH A CONCLUSION
THESE PROCEDURES INCLUDE REVIEW OF SUBSEQUENT EVENTS AND CONTINGENCIES, ASSESSING T
OVERALL ANALYTICAL REVIEW PROCEDURES, AND OBTAINING WRITTEN REPRESENTATIONS FROM T

6.ISSUING A REPORT
THE CONCLUSION IS COMMUNICATED TO VARIOUS INTERESTED USERS THROUGH AN AUDIT REPORT
ACCEPTING ENGAGEMENT
THE FIRM SHOULD CONSIDER TO HAVE THE FOLLOWING:
1.COMPETENCE
2. INDEPENDENCE
3.ABILITY TO SERVE THE CLIENT PROPERLY
4.THE INTEGRITY OF THE PROSPECTIVE CLIENT.

1.COMPETENCE
THE AUDITOR SHOULD HAVE THE NECESSARY SKILLS AND COMPETENCE TO HANDLE THE ENGAGEME

2. INDEPENDENCE
THE AUDITOR SHOULD CONSIDER WHETHER THERE ARE ANY THREATS TO THE AUDIT TEAM'S INDEP

3.ABILITY TO SERVE THE CLIENT PROPERLY

CLOSELY RELATED TO COMPETENCE
THERE SHOUD BE SUFFICIENT DIRECTION, SUPERVISION AND REVIEW OF WORK IN ALL LEVELS IN OR
REASONABLE ASSURANCE.

4.THE INTEGRITY OF THE PROSPECTIVE CLIENT.

THE FIRM SHOULD CONDUCT BACKGROUND INVESTIGATION OF THE RPOSPECTIVE CLIENT.
THIS TASK INVOLVES THE FOLLOWING:

*MAKING INQUIRIES OF APPROPRIATE PARTIES IN THE BUSINESS COMMUNITY

SUCH AS CLIENT'S BANKER, LEGAL COUNSEL, OR UNDERWRITER TO OBTAIN INFORMATION ABOUT T

*COMMUNICATING WITH THE PREDECESSOR AUDITOR

THIS COMMUNICATION ALLOWS THE INCOMING AUDITOR TO OBTAIN INFORMATION ABOUT THE C
THAT WILL BE USEFUL IN DECIDING WHETHER TO ACCEPT OR REJECT THE ENGAGEMENT.
THE INCOMING AUDITOR MUST HAVE FIRST THE PERMISSION OF THEIR PROSPECTIVE CLIENT.

THE INCOMING AUDITOR MAY ASK THE PREDECESSOR AUDITOR ABOUT THE FOLLOWING:
A. THE PREDECESSOR AUDITOR UNDERSTANDING AS TO THE REASONS FOR THE CHANGE OF AUDITO
B. ANY DISAGREEMENT BETWEEN THE PREDECESSOR AUDITOR AND CLIENT.
C. ANY FACTS THAT MIGHT HAVE A BEARING ON THE INTEGRITY OF THE RPOSPECTIVE CLIENT'S MAN

ENGAGEMENT LETTER
AFTER ACCEPTING THE AUDIT ENGAGEMENT, AN ENGAGEMENT LETTER SHOULD BE PREPARED.

THE LETTER SETS FORTH:

* THE OBJECTIVE OF THE AUDIT
*THE MANAGEMENT'S RESPONSIBILITY FOR THE FAIR PRESENTATION OF THE FINANCIAL STATEMEN
*THE SCOPE OF THE AUDIT
* THE FORMS OR ANY OTHER COMMUNICATION THAT THE AUDITOR EXPECTS TO ISSUE.
*THE FACTS THAT BECAUSE OF LIMITATIONS OF THE AUDIT , THERE IS AN UNAVOIDABLE RISK THAT
*THE RESPONSIBILITY OF THE CLIENT TO ALLOW THE AUDTITOR TO HAVE UNRESTRICTED ACCESS TO
INFORMATION REQUESTED IN CONNECTION WITH THE AUDIT.

THE AUDITOR MAY ALSO INCLUDE:

*BIKLING ARRANGEMENT
*EXPECTATIONS OF RECEIVING MANAGEMENT REPRESENTATION LETTER
*ARRANGEMENTS CONCERNING THE INVOLVEMENT OF OTHERS (EXPERTS, OTHER AUDITORS, INTER
*REQUEST CLIENT TO CONFIRM THE TERMS OF ENGAGEMENT.

IMPORTANCE OF THE ENGAGEMENT LETTER:

*AVOID MISUNDERSTANDING WITH RESPECT TO THE ENGAGEMENT
*DOCUMENT AND CONFIRM THE AUDITOR'S ACCEPTANCE OF APPOINTMENT.
RRED AND PERTAIN TO THE ENTITY
EEN RECORDED HAVE BEEN RECORDED.
SACTIONS AND EVENTS HAVE BEEN RECORDED APPROPRIATELY.
RRECT ACCOUNTING PERIOD.
THE PROPER ACCOUNTS.

TS TO ASSETS, AND LIABILITIES ARE OBLIGATIONS OF ENTITY.

HOULD HAVE BEEN RECORDED HAVE BEEN RECORDED.
TS ARE INCLUDED IN THE FINANCIAL STATEMENTS AT
RDED APPROPRIATELY.

NSACTIONS, AND OTHER MATTERS THAT HAVE OCCURRED AND PERTIAN TO THE ENTITY.
IN THE FINANCIAL STATEMENTS HAVE BEEN INCLUDED.
S APPROPRIATELY PRESENTED AND DESCRIBED, AND DISCLOSURES ARE CLEARLY EPRESSED.
DISCLOSEDFAIRLY AND AT APPROPRIATE AMOUNTS

MATERIAL MISSTATEMENT AND THE DESIGN AND PERFORMANCE OF FURTHER AUDIT

UFFICIENT APPROPRIATE EVIDENCE ABOUT A PARTICULAR ASSERTION.

IBLE ASSETS.
BEING PERFORMED BY OTHERS.
PERSONS INSIDE OR OUTSIDE THE ENTITY.
OBORATE INFORMATION CONTAINED IN THE ACCOUNTING RECORDS.
 OF SOURCE DOCUMENTS AND ACCOUNTING RECORDS OR PERFORMING INDEPENDENT CALCULATIONS.
T RETIOS AND TRENDS INCLUDING THE RESULTING INVESTIGATION OF
R RELEVANTINFORMATION OR DEVIATE FROM PREDICTED AMOUNTS.

T THE CONCLUSIONS IN WHICH THE AUDIT OPINION IS BASED.

ENT RELATIONSHIP AND THE SPECIFIC AUDIT ENGAGEMENT.

NDEPENDENCE.

S BUSINESS AND INDUSTRY.

E MADE TO BE ABLE TO DEVELOP AN OVERALL AUDIT STRATEGY.

MS ASSESSING THE LEVEL OF CONTROL RISK.

S AND EVIDENCE SUPPORTING THE AMOUNTS AND DISCLOSURES

ATION OF INTERNAL CONTROL.

R TO REACH A CONCLUSION ON THE FAIRNESS OF THE FINANCIAL STATEMENTS.

TINGENCIES, ASSESSING THE GOING CONCERN ASSUMPTION, PERFORMING
EPRESENTATIONS FROM THE CLIENT'S MANAGEMENT.

ROUGH AN AUDIT REPORT (IN THE FORM OF OPINION)

O HANDLE THE ENGAGEMENT.

THE AUDIT TEAM'S INDEPENDENCE AND OBJECTIVITY.

WORK IN ALL LEVELS IN ORDER TO PROVIDE

PECTIVE CLIENT.

N INFORMATION ABOUT THE CLIENT'S REPUTATION.

FORMATION ABOUT THE CLIENT

ENGAGEMENT.
ROSPECTIVE CLIENT.

THE FOLLOWING:
R THE CHANGE OF AUDITORS.

POSPECTIVE CLIENT'S MANAGEMENT.

HOULD BE PREPARED.

HE FINANCIAL STATEMENTS

CTS TO ISSUE.
UNAVOIDABLE RISK THAT MATERIAL MISSTATEMENTS MAY REMAIN UNDISCOVERED.
UNRESTRICTED ACCESS TO WHATEVER RECORDS, DOCUMENTATION AND OTHER

, OTHER AUDITORS, INTERNAL AUDITORS AND OTHER CLIENT PERSONNEL.

AUDIT PLANNING
INVOLVES DEVELOPING A GENERAL AUDIT STRATEGY AND A DETAILED APPROACH FOR THE EXPECTED CONDUC
ITS MAIN OBJECTIVE IS TO DETERMINE THE SCOPE OF THE AUDIT PROCEDURES TO BE PERFORMED.

IT INVOLVES UNDESTANDINGTHE ENTITY AND ITS ENVIRONMENT

THIS WILL HELP THE AUDITOR IDENTIFY AND UNDERSTAND THE EVENTS, TRANSACTIONS, AND PRACTICES THAT
ON THE FINANCIAL STATEMENTS.

SOURCES TO OBTAIN KNOWLEDGE ABOUT THE CLIENT:

*REVIEW OF PRIOR WORKING PAPERS
*TOUR OF CLIENTS FACILITY
*DISCUSSION WTH PEOPLE WITHIN AND OUTSIDE THE ENTITY
*READING BOOKS, PERIODICALS AND OTHER PUBLICATIONS RELATED TO THE CLIENT'S NDUSTRY

*READING CORPORATE DOCUMENTS AND FINANCIAL REPORTS

MATERIALITY
IS DEFINED IN THE FINANCIAL REPORTING STANDARD COUNCIL'S FRAMEWORK FOR THE PREPARATION AND PR
INFORMATION IS MATERIAL IF ITS OMMISSION OR MISSTATEMENT COULD INFLUENCE THE ECONOMICE DECISI

AUDITOR USES THE MATERIALITY IN PLANNING STAGE TO DETERMINE THE SCOPE OF AUDIT PROCEDURES.
IT IS USED IN THE COMPLETION PHASE OF THE AUDIT, TO EVALUATE THE EFFECTS OF MISSTATEMENT ON THE F

AUDIT RISK -REFERS TO THE RISK THAT THE AUDITORE GIVES INAPPROPRIATE AUDIT OPINION ON THE FINANCI

AUDIT RISK =INHERENT RISK X CONTROL RISK X DETECTION RISK

INHERENT RISK -IS THE SUSCEPTIBILITY OF AN ACCOUNT BALANCE OR CLASS OF TRANSACTIONS TO A MATERIA
THAT THERE WERE NO RELATED INTERNAL CONTROLS.

FACTORS THAT AFFECT THE RISK OF MISSTATEMENT AT THE FS LEVEL INCLUDE:

1. MANAGEMENT INTEGRITY
2. MANAGEMENT CHARACTERISTICS (AGGRESSIVE ATTITUDE TOWARD FINANCIAL REPORTING)
3.OPERATING CHARACTERISTICS (PROFITABILITY OF THE ENTITY RELATIVE TO ITS INDUSTRY IS INADEQUATE)
4.INDUSTRY CHARACTERISTICS (INDUSTRY IS EXPERIENCING A LARGE NUMBER OF BUSINESS FAILURES)

FACTORS THAT AFFECT THE RISK OF MISSTATEMENT AT ACCOUNT BALNCE LEVEL INCLUDE:

1.SUSCEPTIBILITY OF THE ACCOUNT TO THEFT

2.COMPLEXITY OF CALCULATIONS RELATED TO ACCOUNT
3.THE COMPLEXITY UNDERLYING TRNSACTIONS AND OTHER EVENTS
4. THE DEGREE OF JUDGMENT INVOLVED IN DETERMINING ACCOUNT BALANCES.
CONTROL RISK -IS THE RISK THAT A MATERIAL MISSTATEMENT THAT COULD OCCUR IN AN ACCOUNT BALANCE
OR CLASS TRANSACTIONS WILL NOT BE PREVENTED OR DETECTED AND CORRECTED ON

AS THE ASSESSED CONTROL RISK INCREASES, THE AUDITOR SHOULD DESIGN MORE EFF

DETECTION RISK - IS THE RISK THAT AN AUDITOR'S SUBSTANTTIVE PROCEDURE WILL NOT DETECT A MATERIAL
THIS TYPE OF RISK IS CAN BE CONTROLLED BY THE AUDITOR BY DESIGNING EFFECTIVE S

DETECTION RISK= AUDIT RISK

INHERENT RISK X CONTROL RISK

THE LOWER ACCEPTABLE LEVEL OF DETECTION RISK INCREASES THE ASSURANCE TO BE PROVIDED BY SUBSTAN
THE AUDITOR MUST HAVE A SCOPE LIKE:
*PERFORMING THE MORE EFFECTIVE SUBSTANTIVE PROCEDURES (NATURE)
*PERFORMING YEAR-END PROCEDURES (TIMING)
*USING LARGER SAMPLE SIZE (EXTENT)

ON THE OTHER HAND IF ACCEPTABLE DETECTION RISK IS HIGH YOU CAN HAVE THE FF:
*PERFORMING LESS EFFECTIVE SUBSTANTIVE PROCEDURES (NATURE)
*PERFORMING THE TESTS AT INTERIM (TIMING)
*USING SMALLER SAMPLE SIZE (EXTENT)

AUDIT PLANNING
*SET DESIRED LEVEL OF AUDIT RISK
*ASSESS INHERENT RISK

CONSIDERATION OF INTERNAL CONTROL

*ASSESS CONTROL RISK

PERFORMING SUBSTANTIVE TES

*DETERMINE ACCEPTEBLE LEVEL OF DETECTION RISK

MATERIALITY HAS AN INVERSE RELATIONSHIP WITH AUDIT RISK

MATERIALITY AUDIT RISK PLANNED AUDIT PROCEDURES

LOW HIGH MORE EXTENSIVE
HIGH LOW LESS EXTENSIVE

RISK ASSESSMENT PROCEDURES

PERFORMED BY AUDITOR TO OBTAIN UNDERSTANDING OF THE ENTITY AND ITS ENVIRONMENT INCLUDING ITS
THESE INCUDE THE FOLLOWING:
A. INQUIRIES OF MANAGEMENT AND OTHERS WITHIN THE ENTITY
B. ANALYTICAL PROCEDURES
C. OBSERVATION AND INSPECTION

ANALYTICAL PROCEDURES
INVOLVE ANALYSIS OF SIGNIFICANT RATIOSAND TRENDS, INCUDING THE RESULTING INVESTIGATION OF FLUCT
THAT ARE INCONSISTENT OTHER RELEVANT INFORMATION AND DEVIATE FROM PREDICTED AMOUNTS.

PSA 520 REQUIRES THE AUDITOR TO USE AN ANALYTICAL PROCEDURES THE PLANNING AND OVERALL REVIEW

STEPS IN APPLYING ANALYTICAL PROCEDURES

1.DEVELOP EXXPECTATIONS REGARDING FS
2.COMPARE THE EXPECTATIONS WITH THE FS UNDER AUDIT
3.INVESTIGATING SIGNIFICANT DIFFERENCES

USES OF ANALYTICAL PROCEDURES

*AS PLANNING TOOL, TO DETERMINE THE NATURE, TIMING, AND EXTENT OF OTHER AUDITING PROCEDURES
*SUBSTANTIVE TEST TO OBTAIN CORROBORATIVE EVIDENCE ABOUT PARTICULAR ASSERTIONS RELATED TO THE
*AS AN OVERALL REVIEW OF THE FINANCIAL STATEMENTS IN THE COMPLETION PHASE OF THE AUDIT.

AUDIT PROGRAM
IT SETS OUT IN DETAIL THE AUDIT PROCEDURES TO BE PERFORMED IN EACH SEGMENT OF THE AUDIT.
IT SERVES AS A SET OF INSTRUCTIONS TO ASSISTANTS INVOLVED IN THE AUDIT AND AS A MEANS TO CONTROL
EXECUTION OF THE WORK.
IT INCLUDES A DETAILED LIST OF AUDIT PROCEDURES THAT THE AUDITOR BELIEVES ARE NECESSARY TO ACCOM
ACH FOR THE EXPECTED CONDUCT OF THE AUDIT.
S TO BE PERFORMED.

NSACTIONS, AND PRACTICES THAT MAY HAVE A SIGNIFICANT

CLIENT'S NDUSTRY

K FOR THE PREPARATION AND PRESENTATION OF FINANCILA STATEMENTS.

FLUENCE THE ECONOMICE DECISION OF USERS TAKEN ON THE BASIS OF THE FINANCIAL STATEMENTS.

OPE OF AUDIT PROCEDURES.

CTS OF MISSTATEMENT ON THE FIANANCIAL STATEMENTS.

AUDIT OPINION ON THE FINANCIAL STATEMENTS.

OF TRANSACTIONS TO A MATERIAL MISSTATEMENT ASSUMING

CIAL REPORTING)
ITS INDUSTRY IS INADEQUATE)
R OF BUSINESS FAILURES)

EVEL INCLUDE:
OCCUR IN AN ACCOUNT BALANCE
R DETECTED AND CORRECTED ON A TIMELY BASIS BY ACCOUNTING AND INTERNAL CONTROL SYSTEM.

ITOR SHOULD DESIGN MORE EFFECTIVE SUBSTANTIVE PROCEDURES.

E WILL NOT DETECT A MATERIAL MISSTAEMENT.

DITOR BY DESIGNING EFFECTIVE SUBSTANTIVE PROCEDURE, UNLIKE INHERENT AND CONTROL RISK.

CE TO BE PROVIDED BY SUBSTANTIVE TEST.

TS ENVIRONMENT INCLUDING ITS INTERNAL CONTROL

ULTING INVESTIGATION OF FLUCTUATIONS AND RELATIONSHIPS

M PREDICTED AMOUNTS.

LANNING AND OVERALL REVIEW STAGES OF THE AUDIT.

OTHER AUDITING PROCEDURES

LAR ASSERTIONS RELATED TO THE ACCOUNT BALANCES OR TRANSACTION CLASS
ON PHASE OF THE AUDIT.

EGMENT OF THE AUDIT.

T AND AS A MEANS TO CONTROL AND RECORD THE PROPER

IEVES ARE NECESSARY TO ACCOMPLISHE THE AUDIT OBJECTIVES.

INTERNAL CONTROL- IS THE PROCESS DESIGNED AND EFFECTED TO THOSE CHARGED WITH GOVERNANCE,MAN
AND OTHER PERSONNEL TO PROVIDE REASONABLE ASSURANCE ABOUT THE ACHIEVEMENT'S OF MA

COMPONENTS OF INTERNAL CONTROL

A.CONTROL ENVIRONMENT
B.RISK ASSESSMENT
C.INFORMATION AND COMMUNICATION SYSTEM
D.CONTROL ACTIVITIES
E.MONITORING

A.CONTROL ENVIRONMENT
INCLUDES THE ATTITUDES, AWARENESS AND ACTIONS OF MANAGEMENT AND THOSE CHARGED WITH GOVERN
CONCERNING THE ENTITY'S INTERNAL CONTROL.

FACTORS REFELCTED IN THE CONTROL ENVIRONMENT

*INTEGRITY AND ETHICAL VALES
*MANAGEMENT PHILOSOPHY AND OPERATING STYLE
AUDITOR SHOULD ASSESS THE MANAGEMENT ATTITUDES TOWARDS FINANCIAL REPORTING
*ACTIVE PARTICIPATION OF THOSE CHARGE WITH GOVERNANCE
THE ENTITY MUST HAVE AN AUDIT COMMITTEE
*COMMITMENT TO COMPETENCE
*PERSONNEL POLICIES AND PROCEDURES
ENTITY MUST IMPLEMENT APPROPRIATE POLICIES FOR HIRING, TRAINING ETC…
*ASSIGNMENT OF RESPONSIBILITY AND AUTHORITY/ORGANIZATIONAL STRUCTURE
ORGANIZATIONAL STRUCTURE PROVIDES A FRAMEWORK FOR PLANNING, DIRECTING AND CONTROLLING THE E

B.RISK ASSESSMENT
BUSINESS RISK- IS THE RISK THAT THE BUSINESS OBJECTIVES WILL NOT BE ATTAINED AS A RESULT OF INTERNAL

C.INFORMATION AND COMMUNICATION SYSTEM

EFFECTIVE INTERNAL CONTROL MUST PROVIDE TIMELY INFORMATION AND COMMUNICATION.
INFORMATION SYSTEM MUST BE RELEVANT TO FINANCIAL REPORTING OBJECTIVES.
COMMUNICATION INVOLVES PROVIDING AN UNDERSTANDING OF INDIVIDUAL ROLES AND RESPONSIBILITIES P
TO INTERNAL CONTROL OVER FINANCIAL REPORTING.

D.CONTROL ACTIVITIES
ARE POLICIES AND PROCEDURE THAT HELP ENSURE THAT MANAGEMENT DIRECTIVES AARE CARRIED OUT.
IT INVOLVES THE FOLLOWING PROCEDURES:
1.PERFORMANCE REVIEWS
2.INFORMATION PROCESSING
3.PHYSICAL CONTROLS
4.SEGREGATION OF DUTIES

1.PERFORMANCE REVIEWS
REVIEW AND ANALYSES OF ACTUAL PERFORMANCE VERSUS BUDGETS, FORECASTS AND PRIOR PERIOD PERFOR

2.INFORMATION PROCESSING
COMPUTER PROCESSING IS USED IN SIGNIFCANT ACCOUNTING APPLICATIONS, INTERNAL CONTROL PROCEDUR
CLASSIFIED INTO TWO TYPES:GENERAL AND APPLICATION CONTROLS.

3.PHYSICAL CONTROLS
ENCOMPASSSES THE PHYSICAL SECURITY OF ASSETS AND ADEQUATE SAFEGUARDS FOR THE FACILITIES.

4.SEGREGATION OF DUTIES
ASSIGNING DIFFERENT PEOPLE FOR AUTHORIZING TRANSACTIONS,RECORDING TRANSACTIONS AND MAINTAIN

E.MONITORING
IS A PROCESS OF ASSESSING THE QUALITY OF INTERNAL CONTROL PERFORMANCE OVER TIME.
IT INVOLVES ASSESSING THE DESIGN AND OPERATION OF CONTROLS ON A TIMELY BASIS.

ONGOING MONITORING- BUILT INTO NORMAL RECURRING ACTIVITIES OF AN ENTITY

SEPARATE EVALUATIONS-PERFORMED ON NON ROUTINE BASIS SUCH AS FUNCTIONS PERFORMED BY AN INTER

CONSIDERATION OF INTERNAL CONTROL INVOLVES:

1.OBTAIN UNDERSTANDING OF INTERNAL CONTROL
2.DOCUMENT THE UNDERSTANDING OF ACCOUNTING AND INTERNAL CONTROLS
3.ASSESS THE LEVEL OF CONTROL RISK.
4.PERFORM TESTS OF CONTROLS
5.DOCUMENT THE ASSESSED LEVEL OF CONTROL RISKS.

1.OBTAIN UNDERSTANDING OF INTERNAL CONTROL

IT INVOLVES:
*EVALUATING THE DESIGN OF CONTROL
DETERMINING WHETHER IT HAS BEEN IMPLEMENTED

UNDERSTANDING THE DESIGN OF ENTITY'S INTERNAL CONTROL SYSTEM IS ORDINARILY OBTAINED BY

*MAKING INQUIRIES OF APPROPRIATE INDIVIDUALS
*INSPECTING DOCUMENTS AND RECORDS
*OBSERVING OF ENTITY'S ACTIVITIES AND OPERATIONS

TO DETERMINE WHETHER THE DESIGN HAS BEEN IMPLEMENTED AN AUDITOR

PERFORM A WALK THROUGH TEST.
WALK THROUGH TEST.
INVOLVES TRACING ONE OR TWO TRANSACTIONS THROUGH THE ENTIRE ACCOUNTING SYSTEM.

2.DOCUMENT THE UNDERSTANDING OF ACCOUNTING AND INTERNAL CONTROLS

DOCUMENTATION INCLUDE:
*NARRATIVE DESCRIPTION ENTITY'S CONTROL
*FLOWCHART THAT DIAGRAMS THE FLOW OF TRANSACTIONS AND DOCUMENTS
*INTERNAL CONTROL QUESTIONNAIRE PROVIDING MANAGEMENT'S RESPONSES TO QUESTIONS ABOUT INTERN

3.ASSESS THE LEVEL OF CONTROL RISK.

THE AUDITOR SHOULD MAKE A PRELIMINARY ASSESSMENT OF CONTROL RISK.

4.PERFORM TESTS OF CONTROLS

THESE ARE PERFORMED TO OBTAIN EVIDENCE ABOUT THE EFFECTIVENESS OF THE FF:
*DESIGN OF THE ACCOUNTING AND INTERNAL CONTROL SYSTEM
*OPERATION OF THE INTERNAL CONTROLS THROUGHOUT THE PERIOD.

EVIDENCE GATHERING TECHNIQUES

1.INQUIRY
2.OBSERVATION
3.INSPECTION
4.REPERFORMANCE

1.INQUIRY
SEARCHING FOR THE APPROPRIATE INFORMATION ABOUT THE EFFECTIVITY OF THE INTERNAL CONTROL FROM
PERSONS WITHIN AND OUTSIDE THE ENTITY

2.OBSERVATION
LOOKING AT THE PROCESS BEING PERFORMED BY OTHERS.

3.INSPECTION
INVOLVES THE EXAMINATION OF DOCUMENTS AND RECORDS

4.REPERFORMANCE
INVOLVES REPEATING THE ACTIVITY PERFORMED BY THE CLIENT
 WITH GOVERNANCE,MANAGEMENT
HE ACHIEVEMENT'S OF MANAGEMENT'S ENTITY

E CHARGED WITH GOVERNANCE

G AND CONTROLLING THE ENTITY'S OPERATIONS.

AS A RESULT OF INTERNAL AND ETERNAL FACTORS .

S AND RESPONSIBILITIES PERTAINING

S AARE CARRIED OUT.

ND PRIOR PERIOD PERFORMANCE.

NAL CONTROL PROCEDURES CAN BE

OR THE FACILITIES.

SACTIONS AND MAINTAINING CUSTODY OF ASSETS.

PERFORMED BY AN INTERNAL AUDITOR.

LY OBTAINED BY
NG SYSTEM.

QUESTIONS ABOUT INTERNAL CONTROL.

NTERNAL CONTROL FROM KNOWLEDGEABLE