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Auditing Assurance Chapter 1-5, Study notes of Auditing

Bicol University (BU)Auditing

This document is a reviewer for Chapter 1-5 of auditing and assurance

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AUDI 21: AUDITING AND ASSURANCE PRINCIPLE
CHAPTER 1: THE DEMAND FOR ASSURANCE AND
AUDITING SERVICES
CERTIFIED PUBLIC ACCOUNTANT
ASSURANCE
Audit of FS
Examination of Internal Control
Trust Services
Review of FS or Other Information
Risk Advisory Services
Others
NON-ASSURANCE
Tax Services
Management Consultancy (fraud investigation
and IT consultation)
Compilation services
Agreed-Upon Procedures
Others
Assurance
- Independent professional services that improve the
quality of information, or its context, for decision
makers.
- Services that are designed to enhance the degree
of confidence in the information.
Elements:
three-party relationship (practitioner,
responsible party and intended users)
subject matter (e.g., financial or
management reports)
criteria (standards)
evidence (supporting documents)
written report of assurance
Attestation
- An assurance service in which attestor (an
independent accountant) offers assurance about
subject matter (e.g., compliance with debt covenant)
that is the responsibility of another party (e.g.,
manufacturer)
- An independent practitioner engaged to issue a
report on subject matter, or an assertion about a
subject matter, that is the responsibility of another
party.
Attestation services
Agreed-Upon Procedures Engagement - an
attestation services in which the independent
accountant is engaged to report on an item
using procedures the contracting parties agreed
to.
Review engagement - an attestation service in
which the independent accountant perform
analytical procedures, make inquiries of client
personnel and issues a report that provides
limited (sometimes called negative) assurance.
Auditing
- A systematic process of objectively obtaining and
evaluating evidence regarding assertions about
economic actions and events to ascertain degree of
correspondence between these assertions and
established criteria and communicating the results
to interested users.
A systematic process - means an ordered or
structured series of steps
Objectively - Impartial attitude must be maintained
and conduct the audit without bias
Obtaining and evaluating evidence about assertions
- Test the validity of the assertions/representations
by gathering evidence and performing audit
procedures to test these assertions.
Corresponding criteria - Compliance with standards
and other frameworks
Communicating Results / Reporting - A timely report
is a relevant report
CHAPTER 2: INTRODUCTION TO PROFESSIONAL
ACCOUNTANCY
PHILIPPINE ACCOUNTANCY ACT OF 2004 (RA. 9298)
PROFESSIONAL ACCOUNTANT
1. Public Practice
Individual
Practice/Staff of Auditing firms
Independent
2. Government
Employed by the Government
Appointed
Involved in decision making
Civil Service Eligible
3. Commerce and Industry
Employed by the business
Involved in decision making
Prepared the Financial Statement
4. Academe
Professor/Instructor
Auditing
Types of Auditors:
1. External Auditors - FS Audits
Independent auditors who perform
audit of client's historical FS. (i.e. SGV,
individual audit practitioners)
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CHAPTER 1: THE DEMAND FOR ASSURANCE AND

AUDITING SERVICES

CERTIFIED PUBLIC ACCOUNTANT

ASSURANCE

 Audit of FS  Examination of Internal Control  Trust Services  Review of FS or Other Information  Risk Advisory Services  Others NON-ASSURANCE  Tax Services  Management Consultancy (fraud investigation and IT consultation)  Compilation services  Agreed-Upon Procedures  Others Assurance

  • Independent professional services that improve the quality of information, or its context, for decision makers.
  • Services that are designed to enhance the degree of confidence in the information. Elements :  three-party relationship (practitioner, responsible party and intended users)  subject matter (e.g., financial or management reports)  criteria (standards)  evidence (supporting documents)  written report of assurance Attestation
  • An assurance service in which attestor (an independent accountant) offers assurance about subject matter (e.g., compliance with debt covenant) that is the responsibility of another party (e.g., manufacturer)
  • An independent practitioner engaged to issue a report on subject matter, or an assertion about a subject matter, that is the responsibility of another party. Attestation servicesAgreed-Upon Procedures Engagement - an attestation services in which the independent accountant is engaged to report on an item using procedures the contracting parties agreed to.  Review engagement - an attestation service in which the independent accountant perform analytical procedures, make inquiries of client personnel and issues a report that provides limited (sometimes called negative) assurance. Auditing
  • A systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain degree of correspondence between these assertions and established criteria and communicating the results to interested users.  A systematic process - means an ordered or structured series of steps  Objectively - Impartial attitude must be maintained and conduct the audit without bias  Obtaining and evaluating evidence about assertions
  • Test the validity of the assertions/representations by gathering evidence and performing audit procedures to test these assertions.  Corresponding criteria - Compliance with standards and other frameworks  Communicating Results / Reporting - A timely report is a relevant report CHAPTER 2: INTRODUCTION TO PROFESSIONAL ACCOUNTANCY PHILIPPINE ACCOUNTANCY ACT OF 2004 (RA. 9298) PROFESSIONAL ACCOUNTANT
  1. Public Practice  Individual  Practice/Staff of Auditing firms  Independent
  2. Government  Employed by the Government  Appointed  Involved in decision making  Civil Service Eligible
  3. Commerce and Industry  Employed by the business  Involved in decision making  Prepared the Financial Statement
  4. Academe  Professor/Instructor Auditing Types of Auditors: 1. External Auditors - FS Audits Independent auditors who perform audit of client's historical FS. (i.e. SGV, individual audit practitioners)

2. Forensic Auditors - Forensic Audits Hired by clients who perform investigations on fraud, crime embezzlement or reconstructing incomplete accounting records. (i.e. CrFA) 3. Government Auditors - Compliance and Operational Audits Independent government body who audit government offices/agencies (i.e. COA, BIR, SEC, BSP etc.) 4. Internal Auditors - Internal and Operational Audits - Hired by the client as a consultant to check FS, efficiency of operations and effectiveness of internal - Perform independent appraisal activity. - concerned with all kinds of financial and other data generated for both internal and external users. Types of other Audit Services 1. Internal Audit

  • independent
  • add value and improve an organization’s operations
  • bringing systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and government processes 2. Compliance Auditing
  • examination, audit and settlement in accordance with law and regulation
  • determine the extent to which rules, policies, laws, covenants, or government regulations are followed by the entity being audited.
  1. Operational Audit (performance audit or management audit)
  • future-oriented, independent and systematic evaluation performed by the internal auditor for management 4. Forensic Audits
  • detect a deter fraudulent activities Other Non-Assurance Services 1. Agreed-Upon Procedures
  • party engaging the professional accountant or the intended user determines the procedures and the professional accountant provide a report of factual findings as a result of undertaking those procedures. 2. Tax preparation and Planning Services
  • assist clients in preparing and filing tax returns 3. Management Advisory Services
  • providing advice and assistance concerning an entity’s organization, human resources, finances, operations, IT systems, or other activities. 4. Compilation, Accounting and Data Processing System Services
  • bookkeeping, payroll processing, and preparing financial statements.
  • less assurance than a financial statement audit General principles governing the audit of financial statementCode of Professional Ethics (CPE) - Auditors must comply to CPE in order to retain public confidence and credibility of auditors.  Philippine Standards on Auditing (PSA) - Basic principles and essential procedures which Auditors must follow.  Professional Skepticism - Auditor must make critical assessment with a questioning mind. Reasons/Sources why there is a need for an independent FS AuditConflict between management and users - Overly optimistic FS to impress users.  Expertise - Some users are not equipped with basic knowledge on reading the FS.  Remoteness - Users have no direct access to the financial records  Financial Consequences - Misleading FS due to fraud or errors. CHAPTER 3: THE PUBLIC ACCOUNTING PROFESSION ENVIRONMENT CERTIFIED PUBLIC ACCOUNTANT Pre-Qualification Education Requirements - Degree in Bachelor of Science in Accountancy. CPA Licensure Exam - Apply and take the exam given by PRC - Board of Accountancy Other Legal and Regulatory Requirement - Take the Oath, Apply for a license and registration Core Values
  1. Financial Reporting Standards Council (FRSC) - assist the Board in carrying out its powers and functions particularly the adoption of International Financial Reporting Standards in the Philippines
  2. International Auditing Practices Committee (IAPC) - standing committee of the Council of IFAC and is responsible for the development and issuance on behalf of the Council
  3. Auditing and Assurance Standard Council (AASC) - assigned to assist the Board in carrying out its powers and functions particularly the adoption of auditing and assurance standards in the Philippines AUDITOR’S LEGAL LIABILITY To:  Client  Third Parties From:  Undetected improper or inadequate disclosure  Undetected inappropriate valuation Legal Concepts Related to Auditor's Liability
  4. Due professional care / prudent person concept
  • auditors are not infallible and can make errors in judgment but are expected to exercise the same reasonable care with which others in the profession would perform in similar circumstances
  1. Sources of Responsibility (common law or statutory law) - laws that have been developed through court decisions rather than through government statutes (common law). Body of laws passed by legislative bodies such as Congress (statutory law).
  2. Degree of Wrongdoing (ordinary negligence, gross negligence or constructive fraud, and fraud) - absence of reasonable care that can be expected of a person in a set of circumstances; if they do not do what reasonably prudent auditors should do in the circumstances (ordinary negligence). If they consistently fail to follow the standards of the profession on an engagement (gross negligence). _4. Lack of privileged communication
  3. Liability for acts of others_ AUDITOR’S DEFENSE AGAINST CLIENT SUITS  Lack of duty to perform the service  Audit was performed using reasonable care  Absence of causal connection  Client owns actions contributed to the loss  Statute of limitation on the action has expired AUDITOR’S DEFENSE AGAINS THIRD PARTY LAWSUITNonnegligent performance (conducted based on Standards of Auditing)  Lack of privity of contract (not liable to ordinary negligence) (limitations of liability to the parties to a given contract)  Absence of causal connection (nonreliance on the financial statements by the user)  Statute of limitation on the action has expired It is important to remember that while auditors have important responsibilities, management is primarily responsible for maintaining effective internal control and for ensuring the fairness of the company's financial statements. The auditor's responsibility to provide reasonable assurance with respect to errors, fraud and illegal acts clearly shapes the auditor's environment and the work the he or she performs. Challenges CPAs are called to make Professional Judgments  Increasingly complex accounting transactions  Some people still think that Auditors attest material fraud  Complexity of computer system  Globalization as companies expand their operations outside the country  Time pressure in completing audit tasks  Retain clients as most of the business (usually SMEs) cannot offer high retainer's fee. Credibility Crisis To address the said crisis...  CPA can do public practice once they are also accredited by BOA  CPA can sign the AFS once they are accredited by both BOA and BIR, depending on the type of Corporation it may also require accreditation with SEC  CPAs are all bound to comply with the Revised Code of Ethics for Professional Accountants  BOA conduct Quality Assurance Review (QAR) for those CPA who will renew their accreditation

CHAPTER 4: MANAGEMENT OF PUBLIC ACCOUNTING

PRACTICE

Public Accounting Firm Organization (page 67) AUDITING POSITIONS

1. Audit Partner  overall quality of each audit  signs the audit report  accepting ultimate responsibility for each audit  involved in maintaining client relationships, planning audits, and evaluating the audit findings  resolving technical matters (application of accounting principles or which auditing procedures are to be performed) 2. Audit Manager/Supervisor  administers important aspects of audit engagements  scheduling the audit work to be done with client personnel  assigning work to audit staff  supervising staff  reviewing staff work  often responsible for controlling staff time and overseeing billing and collections  keep the audit partner apprised of significant developments during the audit 3. In-charge (Senior) Auditor  Work under the direction of audit managers and assist them in administering the audit  Participate in audit planning and provide direct supervision to staff auditors  Review work performed by staff auditors and summarize audit findings for the audit partner to review 4. Staff Auditor  Perform various audit procedures  Gather audit evidence to use as a basis for the audit reports  Perform procedures that relate to a variety of aspects of a client’s activities Philippine System of Quality Management (PSQM)  Replaces Philippine System of Quality Control (PSQC)  Firms are required to have systems of quality management designed  implemented by December 15, 2022Components (MERGER IA) : M - monitoring and remediation process E - ethical requirements that are relevant R - risk assessment process G - governance and leadership E - engagement performance R - resources I - information and communication A - acceptance and continuance of client relationships Objectives:  provide reasonable assurance that firms Fulfill responsibilities in accordance with professional standards  issued engagement report is appropriate (2022 ADDENDUM: NEXT) CHAPTER 5: PROFESSIONAL ETHICS Ethical behavior by professionals is necessary to maintain public confidence in the profession, and in the services provided by members of that profession. The ethical requirements for CPAs are similar to the ethical requirements of other professions. The major difference between other professional groups and CPAs is independence. Independence in fact exists when the auditor is actually able to maintain an unbiased attitude throughout the audit, whereas independence in appearance is dependent on others’ interpretation of this independence and hence their faith in the auditor. The public interest is defined as the community’s collective well-being. CPAs handle ethical conflicts best by acting with integrity, objectivity, and due professional care and by having a genuine interest in serving the public. An ethical dilemma is a situation that a person faces in which a decision must be made about the appropriate behavior. Ethical responsibility for acts of non-CPAs under a CPA’s supervision falls under the latter’s jurisdiction. A CPA shall not permit others to carry out on his behalf, either with or without compensation, acts which, if carried out by the CPA, would place him in violation of the Code of Ethics. Added to your vocabulary:

 Where gifts or hospitality is made in the normal course of business without the specific intent to influence decision making or to obtain information, it may be conclude that any threat to compliance with fundamental principles is at an acceptable level. When the threats cannot be eliminated or reduced to an acceptable level through the application of safeguards, the professional accountant in public practice should not accept such offer.  Accepting significant gifts may arise to self- interest threat to objectivity.

  1. Custody of Client Assets (270)  A professional accountant in public practice entrusted with money or other assets shall: a) Keep such assets separate from personal or firm assets. b) Use such assets only for the purpose for which they are intended. c) At all times, be ready to account for those assets, and any income, dividends or gains generated, to any person entitled to such accounting. d) Comply with all relevant laws and regulations relevant to the holding of and accounting for such assets
  2. Independence (290)Independence of mind is a state of mind that permits the CPA to perform an attest service without being affected by influences that might compromise professional judgment, thereby allowing that individual to act with integrity and to exercise objectivity and professional skepticism.  Independence in appearance requires the avoidance of circumstances that might cause a reasonable and informed third party, aware of all information, including safeguards applied, to reasonably conclude that the integrity, objectivity, or professional skepticism of an audit firm or member of the attest engagement team has been compromised.
  3. Financial Relationships The Code restricts the financial interest that an auditing may have either in the client itself or with client personnel. a. A financial interest is an ownership interest in an equity or a debt security issued by an entity; such interest may be direct or indirect. b. A direct financial interest includes an investment in the client, such as owning capital stock or providing loans to the client. c. An indirect financial interest generally involves an intermediary of some sort. Concerning direct and indirect financial relationships of external auditors: a. All direct financial interests are prohibited, regardless of amount b. Material indirect financial interests are prohibited.
  4. Loan and guarantees (290.117)  A loan, or a guarantee of a loan, from an audit client is a bank or a similar institution to a member of the audit team, or a member of that individual’s immediate family, does not create a threat to independence if the loan or guarantee is made under normal lending procedures , terms, and conditions. Example of such loans include home mortgages, bank overdrafts, car loans and credit card balances.
  5. Business Relationship (290.123)  A business relationship between the external auditor and the client or a member of the auditor’s immediate family, in a closely-held entity when the audit client or a director or officer of the client or any group thereof, also holds an interest in that entity does not create threats to independence if :  The business relationship is insignificant to the firm, the member of the audit team and the immediate family member, and the client;  The financial interest is immaterial to the investor or groups of investors; and  The financial interest does not give the investor, or group of investors the ability to control the closely-held entity
  6. Employment with an Audit Client (290.133) Independence would be deemed to be compromised unless: a. The individual is not entitled to any benefits or payments from the firm, unless made in an accordance, with fixed pre-determined arrangements, and any amount owed to the individual is not material to the firm; and

b. The individual does not continue to participate or appear to participate in the firm’s business or professional activities

  1. Temporary Staff Assignments (290.140) Generally, the lending of staff by a firm to an audit client may create a self-review threat. However, such assistance may be given for only a short period of time and the firm’s personnel shall not be involved in: a. Providing non-assurance services that would not be permitted under this code, or b. Assuming management responsibilities
  2. Providing Non-Attest Services (290.154)  While the CPAs should not perform management functions or make management decisions for the attest client, they may provide advice, research materials, and recommendations to assist the client. In such circumstances the client must agree to a. Assume all management responsibilities b. Oversee the services, by designing an individual, preferably within senior management, who possesses suitable skill, knowledge, and/or experience. c. Evaluate the adequacy and the results of the services performed. d. Accept responsibility for the results of the services. e. Establish and maintain internal control, including monitoring ongoing activities.
  3. Preparing Accounting Records and Financial Statements (290.164)  Providing an audit client with accounting and bookkeeping services such as preparing accounting records and financial statements creates a self-review threat when the firm subsequently audits the financial statements.  The firm may provide services related to the preparation of accounting records and financial statements to an audit client that is not a public interest entity where the services are of a routine or mechanical creature, so long as any self-review threat created is reduced to an acceptable level.
  4. Valuation Services (290.171)  Performing valuation services for an audit client may create a self-review threat. The significance of any threat created shall be evaluated. 14. Tax Return Preparation (290.177)  Providing tax return preparation service does not generally create a threat to independence if the client takes responsibility for the returns including any significant judgments made.  Based on historical information and principally involved analysis and presentation of such historical information under existing law
  5. Internal Audit Services (290.190)  The provision of the internal audit services creates a self-review threat to the independence if the firm uses the internal audit work in the course of a subsequent external audit.
  6. IT System Services (290.196)  Providing system services may create a self- review threat to threat to independence depending on the nature of services and IT systems.
  7. Litigation and Support Services (290.202)  Litigation support services may create a self- review threat or advocacy threat.
  8. Legal Services (290.204)  Legal services that support an audit client in executing legal action (e.g., legal advice, legal due diligence and restructuring) may create self-review threats.
  9. Recruiting Services (290.209)  Providing recruiting services to an audit client may create self-interest , familiarity or intimidation threats. The existence and significance of any threat will depend on factors such as:  the nature of the requested assistance; and  the role of the person to be recruited
  10. Fees-Relative Size (290.215)  A professional accountant in practice may quote whatever fee deemed to be appropriate. However, a self-interest threat to professional competence and due care is created if the fee quoted is so low that it may be difficult to perform the engagement in accordance with applicable technical and professional standards for that price
  11. Fees Overdue (290.218)