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Auditing Reviewer-Accounting, Study notes of Auditing

Universitas Riau (UR)Auditing

auditing reviewer all about the auditing in chapter one book 2018

Typology: Study notes

2019/2020

Uploaded on 12/13/2020

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AUD THEO - CHAPT 1
Types of Assertions (when ur testing a specific account)
1. Occurence
- all transaction recognized in fs has occurred relating to the company
2. Completeness
- lahat ng transactions are recorded and recognized in fs, walang kulang
3. Accuracy
- recorded accurately with the proper amounts (transposition error) mathematical
accuracy
4. Cut off
- all transactions are recognized in the proper acctng period, related in the current
period, accounted properly - accrued and prepaid exp.
5. Classification
- transactions are classified fairly, correctly.
Systematic Process of Auditing
-requests of documents, review of these documents, relationship of assertions and
established criteria (pfrs, pas), discussed to mgt.
Four phases/activities in Auditing (should be in order)
1. Pre-engagement activities
- nagkakaroon ng client, agreement, how much would it be, scheduling ng budgeting,
draft of engagement letter (negotiation of fees, period (gaano katagal audit ng isang
company), client inquiries
2. Risk assessment.
- kick off meeting, actual meeting (partners, bosses, engagement managers,
president, plans documents needed, 1-2hrs), understanding of entity and
environment
(1. recurrent client-reconfirmation, palaging client) , interview, changes sa process,
materiality (depends on ur industry, certain percentage na gagamitin then multiply to
the total assets to get the materiality-how to get the percentage depends on the audit
firm) ... now a client will give u TB, accnts that are equal and above the materiality
*Internal Control
3. Substantive testing
- Tama ba bilang (Testing of inv) (testing of bank reconciliation) (testing of cash)
making analytical, procedures, more on documentation, movement of a certain
account (increase decrease)
4. Completion
- closing meeting, finalization (acceptable ba mga findings) during the substantive
testing nadiscuss mo na ung findings para aware ang mgt like major findings, review
of fs, audit if tama amounts and disclosures.
Types of Audit
1. FS Audit
- focus in assertions, representation made by the mgt in accordance with the
framework (focus ito ng discussion)
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AUD THEO - CHAPT 1

Types of Assertions (when ur testing a specific account)

1. Occurence - all transaction recognized in fs has occurred relating to the company 2. Completeness - lahat ng transactions are recorded and recognized in fs, walang kulang 3. Accuracy - recorded accurately with the proper amounts (transposition error) mathematical accuracy 4. Cut off - all transactions are recognized in the proper acctng period, related in the current period, accounted properly - accrued and prepaid exp. 5. Classification - transactions are classified fairly, correctly. Systematic Process of Auditing -requests of documents, review of these documents, relationship of assertions and established criteria (pfrs, pas), discussed to mgt. Four phases/activities in Auditing (should be in order) 1. Pre-engagement activities

  • nagkakaroon ng client, agreement, how much would it be, scheduling ng budgeting, draft of engagement letter (negotiation of fees, period (gaano katagal audit ng isang company), client inquiries 2. Risk assessment.
  • kick off meeting, actual meeting (partners, bosses, engagement managers, president, plans documents needed, 1-2hrs), understanding of entity and environment (1. recurrent client-reconfirmation, palaging client) , interview, changes sa process, materiality (depends on ur industry, certain percentage na gagamitin then multiply to the total assets to get the materiality-how to get the percentage depends on the audit firm) ... now a client will give u TB, accnts that are equal and above the materiality *Internal Control 3. Substantive testing
  • Tama ba bilang (Testing of inv) (testing of bank reconciliation) (testing of cash) making analytical, procedures, more on documentation, movement of a certain account (increase decrease) 4. Completion
  • closing meeting, finalization (acceptable ba mga findings) during the substantive testing nadiscuss mo na ung findings para aware ang mgt like major findings, review of fs, audit if tama amounts and disclosures. Types of Audit 1. FS Audit
  • focus in assertions, representation made by the mgt in accordance with the framework (focus ito ng discussion)

2. Compliance Audit - audit by the govt unit like bir, issue loa to open books to audit 3. Operational/Performance Audit - to assess or measure the performance of an entity (internally), effectiveness and efficiency. Types of Auditors 1. External Auditors

  • CPAs in public practice, who works in audit firms, external because appointed sila ng companies 2. Internal Auditors
  • employed ng company. to assist improvement 3. Govt Auditors
  • employee of govt Assurance provided by the auditor (REASONABLE) Using of Sampling data Testing 1. Sampling Testing -we dont audit 100% population, inaalam mo muna ung laman 2. Specific Identification 3. Random Sampling
  • such applications are used. maraming transactions pero maliliit lahat 4. 100% Population Nature of Evidence 1. Persuasive
  • power to influence or persuade auditors na tama ung nakuha nilang supporting document (75% - 25% inherit limitation) 2. Conclusive AUD THEO- CHAPT 2 Why do this auditing standards matter? -provides minimums guidance, to determine the audit steps na gagawin and iapply to achive objective in a specific accnt Objectives? -accuracy, completeness etc. -yardstick, sukatan kung gaano kaganda ung quality of auditing -itong standard pinaka criteria for auditors Guidelines of PSA
  • not mandatory but prescriptive or suggested na sundin at the minimum Req for GAAS List fo 10 Standards
  1. General standards -TIP -Technical Training and Proficiency (adequate, requirement of gaas is the u should

Adoption of International Standards Council

  • to promulgate auditing standards, practices or procedures sa buing mundo
  • each country kailangan nakaalign sa international standard na ito Structure of Auditing and Assurance Standard Council 2 Frameworks / Pronouncements 1. Framework for Assurance ENGAGEMENTS - audit (the auditors must corroborate the ending balances in the clients’ accounts and disclosures) (falls to examinations of source documents, third party.confirmstions, physical inspection, dust of internal controls and other procedures) - review ( auditor conducts inquiries, performs analytical procedures-why kagi tanong, wag kang magtatanong ng yes or no ang sagot palgi dapat may explanation) (limited level of assurance-to say that fs presented do not require material modifications) - other assurance engagements 2. Related Services -agreed upon procedures engagements (usually no opinion given, but the client receives a final report, hindi siya audit opinion, provides details and results of the procedures na pinaperform ng client) -compilation engagement (requires auditor to simply present the fs based on the representations made by the mgt) ( no effort to verify this information) (objective is to assist mgt in presenting fs w/o undertaking to provide any assurance) Level of assurance -the level of assurance of the fs of tbe client are fairly presented is at its highest for an audit -lowest ung sa compilation (pinakamababa or wala tlaga) -review, somewhere in bw the audit and compilation Reliance on management -all three engagements, the auditors begin with the account balances provide by the mgt however -audit requires a significant amount of corroboration, where you verify info based on the account balances or trial balances -a review naman requires some testing of the information -a compilation almost entirely nagrerely sa prinesent ng mgt, kinocompile mo lang, prinepresent mo lang Understanding of internal control
  • auditor only tests the internal control of a client in an audit - for review and compilation no need for internal control testing Work Perform (gaano kabigat) -auditor requires a significant hour to complete ung audit since sobrang daming audit procedures each account

-review requires substantially, fewer hours -compilation, sobrang minor ng effort, parang bookkeeping, pinakamura na bayad Price -audit pinakamahal -review mas mahal sa compilation -compilation pinakamura System of Quality Control -when u audit in a yr di pa tapos yon, in audit after ikang weeks or months after, kami naman ang iauaudit ng international counterpart namin. -ung quality of our audit irereview ng auditor from other countries -Planning - Risk Assessment - Substansive Testing-Completion -Pag di nakapasa ng quality control based on international standards in auditing, meron ka rating na need for improvement or fail -if nakapasa, passed or satisfactory -ung quality ng audit natin, inaaudit din yan Ethical Principles/Requirements

1. Integrity 2. Objectivity 3. Professional competence and due care 4. Confidentiality 5. Professional Behavior 5 Elements of Quality Control 1. Independence, Integrity, and Objectivity (Independence) -Ind -ur need to be impartial bw sa mgt or company and tyaka sa users, dapat wala kang pinapanigan -Int - ur required to be honest, and candid with the constraints of client confidentiality, u cant divulge information about the client kung kani kanino lang, u cant share sa labas -Obj - the principle imposes the obligation to be impartial, not bias, and also intellectually honest, free of conflict of interest. -these three are interchangeably in meaning 2. Personal Mgt (Human Resource and Assignment) -Hiring, Assigning personnel into engagements or audit engagement, Professional Devt and Advancement Activities -Recruitment, Perf eval, compensation and promotion, capabilities and competence, career devt, assignment of engagement teams -sufficient personnel with the capabalities, competence, and commitment to ethical principles necessary to perform engagement. -appropriate capabilities, competence and time to perform tha audit engagement in accordance wjth prof standards and regulatory and legal requirements -because ur bringing the id of the firm -trainings about audits, updates of standards, sa bir -asset ng firm ang nga tao kaya need maginvest sila doon

  • Hiring - those hired should possess the appropriate characteristics, then able to perform competently
  • Assignment - work is assigned to a erson having a high technical degree of training, di ka pwedeng magaudit pag di ka cpa

-prof devt actuvities, is it effective? naapply ba sa engagements -continued adequaxy and operational effectiveness of quality control policies and procedures Renewal fo Cert of Accreditation -cpa's or indi or has cpa firms is required to renew their cert of practice every three years sa BOA in coordination with PRC AUD THEO – CHAPT 3 Responsibilities and Functions of the Independent Auditor Distinction bw the responsibility of the auditor and resp of the mgnt The auditor has the responsibility to:

1. Plan and perfom /design the audit to obtain reasonable assurance about whether the fs are free from material misstatements whether caused by error or fraud 2. Auditor is resp to express opinion regarding the fs  can suggest or draft of specific disclosures, sample new standards (Auditors cannot be held responsible with the prevention of error and fraud - Inherent Limitation)  Nature of Evidence and characteristics of fraud, auditors can only obtain reasonable but not absolute assurance that the material misstatements are detected The mgnt responbility: 1. The fs are the management responsibility 2. for adopting sound acctng policies and for establishing and maintaining internal control including initiation, recording, processing and recording of transactions. (and ofc transactions are consistent with the assertions) 3. Fair presentation of the fs should be aligned or with conformity with the GAAP Goal of auditors: detect the material misstatements caused by error, fraud or non-compliance with laws and regulations not necessarily e, f or nc Material Misstatements may come from: 1. Error -unintentional, may nakalikutan ilagay or sobra nalagay -mathematical or clerical mistakes (transposition error, typo error(incorrect acctng estimates used

  • mali computation for allowance doubtful acctnts, depreciation na ginamit or pagkuha ng fair value of inv, other intangible assets) -mistakes in applying acctng policies (inv valuation-fifo, consolidate of parent and subsidiary) (policies may vary to company to company, but should comply with GAAP) 2. Fraud -intentional -one or more than one employees usually from top levels, charge with governance, third party that has direct control or r-ship in the company ( ceo, president, coo, cfo, acctng managers, dept heads) -mgnt -sila ung nagcocontrol ng functioning of the org, under the charge with governance -charged with governance - nagcocontrol ng functioning of mgnt (BOD, Audit

Committee) higher level

  • fraud takes place when u find evidence of intent to mislead (use of deception, illegal advantage)
  • auditors primarily concern sa nagcause ng misstatements 3. Non Compliance with Laws and Regulations
  • acts of omission - either intentional or unintentional
  • like tax evasion, violation of environmental protection laws, inside trading securities
  • it is the mgnt responsibility to have compliance im the laws and regulations, they need to prevent and detect the non-compliance
  • auditors resp - cant be expected to detect non-compliance but we should recognize non-compliance if pag may nakita tayo
  • auditors also review the income tax computation of the client, and also sa disclosures ng fs portions that are related to basic income tax computations, it should be tied up Two Types of Fraud 1. Misstatements on Company Financial Reports (BS, IS, Equity, Cashflows, Disclosures 2. Misappropriation of Company Assets (stolen) "if employees perceive their company's fraud controls to be weak and they think that their mgnts is only giving lip service.meaning light lang di sineseryoso ang ethical behavior then fraud is inevitable" Best Example for Fraud : Enron Scandal 2001
  • faking profits, mark to market acctng, ung cost ng isang investment nila 10 tas mafket value is 15, 15-10 = 5 gain which is unrealized, to make profits look higher. Bumagsak din ang arthur and anderson audting services. and maraming nakasuhang officials. ilang yrs nila inaudit tas di nila napansin Missappropriation of Asset Example: 1. Embezzling Receipts -happens when an employee fakes a receipt or billing pars yun ang bayaran ng company then use it for personal interest 2. Lapping of AR -happens when an employee edits or revise or alters AR records to hid the cash stolen (done by diverting a payment from one customer, hiding a theft by diverting cash from another customer to offset the receivable from the first customer 3. Stealing of Entity's Asset: Cash, Inventory Planning phase Testing Phase in relation to Errora and Fraud
  • we do conduct interviews with the mgnt and with those charged with governance such as directors, presidents, ceo, cfo
  • we do inquiries, interviews - we consider asking acctng data entry, IT personnel whether

3. Rationalization - jinajustify mo ang isang mali na tama, u show a mistake like its correct, palabasin na tama pero malintalaga siya -examples:  they treated me wrong, to do revenge  upper mgnt is doin it and so i can do it  last resort just to not lost my job, or an upper, or higher position to him direct him to do fraud If the auditor believes that theres a misstatement but the effect is: 1. immaterial - u need to inform the mgnt but depends who made it, if the mgnt did it maybe u have to inform the ceo, u inform the higher level from the person who commited it (refer to appropriate level) 2. material - there are fraud thst are material that are not directly affecting the fs bu operations - inform the higher level (appropriate level) - if doubtful, can suggest magconsult ng legal counsel about sa implication nadetect na fraud, if mayron lang silang nadetect, mga obvious talga Completion Phase related in fraud -auditor should obtain mgnt representations letter ( includes the discussion about then error or fraud na dapat responsibility ni mgnt, sila ang umaako) (binibigay after audit or nirirelease ang audit report) (inaacknowledge nila na sila ang responsible in implementation and operations of the acctng and internal control that are design to prevent and detect error and fraud -attached sa mgnt representation letter or summary of such items that are uncorrected fs misstatements aggregated are immaterial, both individually or aggregate combined (immaterial misstatements where na pagpinagsamasama or tinotal di lalagpas sa materiality threshold. it uncorrected fs misstatements) -imention din ni mgnt sa letter na dinisclose nila lahat kay auditor lahat ng fraud related or suspected fraud related transactions na naging aware si mgnt -imention na nagdisclose sila kay auditor ng assessment results of those related sa fraud that are risk assessment. How to Consider the effect the errors or fraud sa auditors report natin? -if the auditor believes that the material misstatement from error or fraud exists then nirequest si mgnt to adjust or revise ung ganito amount or disclosure and pagdi pumayag si mgnt either u qualify opinion (u have exceptions) or adverse opinion ( if sobrang extensive ng material misstatement) -if the auditor unable to evaluate the effect of fraud, because ur not given additional documents to check if existing ba takaga ung error na un (inherent limitation) , we can issue qualified or disclaimer opinion If it is find out after the audit, it is not fault of the auditor simply because auditor follows the proper procedures, basic principles of PSA (it depends om the magnitude of error like enron) Planning Phase of Non-compliance

-need to have general understanding of the framework of the regulatory or legal ng company (don mo malalaman anong requiremnts niya as a company) Testing Phase

  • almost the same sa effect like in error and fraud Completion Phase
  • same u need the mgnt representation letter
  • nakapagdisclose si mgnt sa auditor ng possible or actual non-compliance
  • consideration nung effect sa audit report lile u ask them to adjust and they dont want, either qualify, adverse