PSA ppt by sir jekell

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

The procedures 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


Purpose

To establish 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 Opinion2. Disclaimer of Opinion3. Qualified or Disclaimer of Opinion on the Income

Statement and Unqualified Opinion on the Balance Sheet.


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.


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


Purpose

To establish 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


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 Risks1. 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


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 inDeciding 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 OFINTERNAL AUDITING


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


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 theAuditor’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


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

The engagement partner should take responsibility for the overall quality on each audit engagement to which that partner is assigned.

Ethical Requirements

The engagement 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 SpecificAudit 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.

Documents

PSA ppt by sir jekell