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A. AUDIT PROCEDURES
Audit Procedures are the methods or acts that auditor use to gather evidence to determine the validity of Financial Statement assertions. The auditor obtains audit evidence by one or more of the following procedures:
OBSERVATION
D E
F
COMPUTATION / REPERFORMANCE
TRACING
RECONCILIATION
G H
VOUCHING
ANALYTICAL PROCEDURES
INSPECTION
o It consists of examining records, documents, or tangible assets. o Inspection of records and documents provides audit evidence of varying degrees of reliability depending on their nature and sources and the effectiveness of internal control over their processing. o Three major categories of documentary audit evidence: I. Documentary audit evidence created and held by the third parties; II. Documentary audit evidence by third parties and held by the entity; III. Documentary audit evidence created and held by the entity.
SALES ORDER
PICKING SLIP
BILL OF LADING
SALES INVOICE
GENERAL LEDGER
TRACING (COMPLETENESS)
OBSERVATION
o It consists of looking at a process or procedure being performed by others.
Since there is a risk that recipients of a positive form of confirmation request with the information to be confirmed contained on it may sign and return the confirmation without verifying that the information is correct, blank forms may be used as one way to mitigate this risk. Thus, the use of blank confirmation requests may provide a greater degree of assurance about the information confirmed. However, blank forms might result in lower response rates because additional effort may be required of the recipients; consequently, the auditor may have to perform more alternative procedures. o The negative form requests the recipient to respond only if he or she disagrees with the information stated on the request. Negative confirmation requests may be used to reduce audit risk to an acceptable level when (a) the combined assessed level of inherent and control risk is low, (b) a large number of small balances is involved, and (c) the auditor has no reason to believe that the recipients of the requests are unlikely to give them consideration.
1-1 Example 1:
In connection with an audit of the financial statements of (insert name of client) as of December 31, 200X and for the year then ended, please confirm directly to our auditors (insert name and address of auditors) the amount of your indebtedness to us as of December 31, 200X, which according to our records amounted to _________________. Please check the appropriate response below after determining whether this is in agreement with your records. If there are differences, please provide any information in sufficient detail to assist our auditors in reconciling the difference. After checking the appropriate response below, please sign and date your reply and mail it directly to our auditors in the enclosed return envelope. DO NOT SEND ANY PAYMENTS TO OUR AUDITORS. Thank you for your anticipated timely cooperation with this request. Respectfully, (Name of client) (Clients authorized signature and title) *********************************************** TO: (Insert auditors name) ( ) The balance due (insert clients name) shown above as of December 31, 200X is correct. ( ) Our records show a balance of tug as of December 31, 200X and the difference may be due to the following:
Signature:
Notes And Observations: 1. This standard confirmation request should be modified if the auditor believes that the customer pays by invoice, rather than by statement and it is therefore more effective and appropriate to confirm open invoices. The following alternative confirmation request is an illustration of how the standard confirmation request might be modified to confirm open invoices. Example 2: (Date) (Customers name and address) Dear : In connection with an audit of the financial statements of (insert name of client) as of December 31, 200X and for the year then ended, please confirm directly to our auditors (insert name and address of auditors) the amounts on the invoices listed below (or in the attached statement) as shown by our records that you were indebted to us as of December 31, 200X. Please take notice that the invoices that our auditors have selected for confirmation purposes may represent only a portion of the total balance due from you. Invoice Number Invoice Date Invoice Amount
Please check the appropriate response below after determining whether this is in agreement with your records. If there are differences, please provide any information in sufficient detail to assist our auditors in reconciling the difference. After checking the appropriate response below, please sign and date your reply and mail it directly to our auditors in the enclosed return envelope. DO NOT SEND ANY PAYMENTS TO OUR AUDITORS. Thank you for your anticipated timely cooperation with this request. Respectfully, (Name of client)
Signature: Title: Date: 2. If the auditor believes that an itemized customer statement of the balance due would assist the customer in reconciling the amount due as of the confirmation date, the auditor should include the following sentence after the first sentence of the confirmation request: Enclosed is an itemized statement of the balance due that is being furnished to assist you in reconciling the amount shown in your records with the amount shown per our records. 1-2 Confirmation - Negative Request (Prepared on clients letterhead)
TRACING o
Involves establishing completeness of transaction processing by following a transaction forward through the accounting records.
RECONCILIATION
o This procedure involves establishing agreements between two sets of independently maintain but related records.
VOUCHING
o Involves following a transaction back to supporting documents from subsequent processing step (also referred to as tracing back). This is used to establish the existence or occurrence or recorded
transactions.
ANALYTICAL PROCEDURES
o Consists of comparing relationship between data to determine the reasonableness of recorded amounts. o It also involves analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or deviate from predicted amounts. o Data can be financial or nonfinancial, industry wide data or client data.
Illustration1: Circumstances include the following: Audit of a complete set of general purpose financial statements prepared by management of the entity in accordance with Philippine Financial Reporting Standards. The terms of the audit engagement reflect the description of managements responsibility for the financial statements in [proposed] PSA 210 (Redrafted).8 Inventories are misstated. The misstatement is deemed to be material but not pervasive to the financial statements. In addition to the audit of the financial statements, the auditor
INDEPENDENT AUDITORS REPORT [Appropriate Addressee] Report on the Financial Statements We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as at December 31, 20X1, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory information. Managements Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion. Basis for Qualified Opinion The companys inventories are carried in the balance sheet at xxx. Management has not stated the inventories at the lower of cost and net realizable value but
Illustration2: Circumstances include the following: Audit of consolidated general purpose financial statements prepared by management of the parent in accordance with Philippine Financial Reporting Standards. The terms of the audit engagement reflect the description of managements responsibility for the financial statements in [proposed] PSA 210 (Redrafted). The financial statements are materially misstated due to the non-consolidation of a subsidiary. The material misstatement is deemed to be pervasive to the financial statements. The effects of the misstatement on the financial statements have not been determined because it was not practicable to do so. In addition to the audit of the consolidated financial
INDEPENDENT AUDITORS REPORT [Appropriate Addressee] Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of ABC Company and its subsidiaries, which comprise the consolidated balance sheet as at December 31, 20X1, and the consolidated income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory information. Managements Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Philippine Financial Reporting Standards; this includes the design, implementation and maintenance of internal control
relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as
Illustration3: Circumstances include the following: Audit of a complete set of general purpose financial statements prepared by management of the entity in accordance with Philippine Financial Reporting Standards. The terms of the audit engagement reflect the description of managements responsibility for the financial statements in [proposed] PSA 210 (Redrafted).
INDEPENDENT AUDITORS REPORT [Appropriate Addressee] Report on the Financial Statements We have audited the accompanying financial statements of ABC Company, which comprise the balance sheet as at December 31, 20X1, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Managements Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the
Illustration4: Circumstances include the following: Audit of a complete set of general purpose financial statements prepared by management of the entity in accordance with Philippine Financial Reporting Standards. The terms of the audit engagement reflect description of managements responsibility for the the
INDEPENDENT AUDITORS REPORT [Appropriate Addressee] Report on the Financial Statements We were engaged to audit the accompanying financial statements of ABC Company, which comprise the balance sheet as at December 31, 20X1, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Managements Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on conducting the audit in accordance with Philippine Standards on Auditing. Because of the matter described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Basis for Disclaimer of Opinion The companys investment in its joint venture XYZ (Country X) Company is
Illustration5: Circumstances include the following: Audit of a complete set of general purpose financial statements prepared by management of the entity in accordance with Philippine Financial Reporting Standards. The terms of the audit engagement reflect the description of managements responsibility for the financial statements in [proposed] PSA 210 (Redrafted). The auditor was unable to obtain sufficient appropriate audit evidence about multiple elements of the financial statements. That is, the auditor was unable to obtain audit evidence about the entitys inventories and accounts receivable. The possible effects of this inability to obtain sufficient appropriate audit evidence are deemed to be both material and pervasive to the financial statements.
INDEPENDENT AUDITORS REPORT [Appropriate Addressee] Report on the Financial Statements We were engaged to audit the accompanying financial statements of ABC Company, which comprise the balance sheet as at December 31, 20X1, and the income statement, statement of changes in equity and cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes. Managements Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation29 of these financial statements in accordance with Philippine Financial Reporting Standards; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on conducting the audit in accordance with Philippine Standards on Auditing. Because of the matters described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Basis for Disclaimer of Opinion We were not appointed as auditors of the company until after December 31, 20X1 and thus did not observe the counting of physical inventories at the beginning and end of the year. We were unable to satisfy ourselves by alternative means concerning the inventory quantities held at December 31, 20X0 and 20X1 which are stated in the balance sheet at xxx and xxx, respectively. In addition, the introduction of a new computerized accounts receivable system in September 20X1 resulted in numerous errors in accounts receivable. As of the date of our audit report, management was still in the process of rectifying the system deficiencies and correcting the errors. We were unable to confirm or verify by alternative means accounts receivable included in the balance sheet at a total amount of xxx as at December 31, 20X1. As a result of these matters, we were unable to determine whether any adjustments might have been found necessary in respect of recorded or unrecorded inventories and accounts receivable, and the
RESOURCES:
Cabrera, E. (2010). Assurance Principles, Professional Ethics and Good Governance. Manila: GIC Enterprises & Co., Inc. American Institute of Certified Public Accountants, Inc. (1996, 1998). Retrieved March 4, 2013. For http://pcaobus.org/standards/auditing/pages/au330.aspx#pspcaob_87303449-49eb-4001-ae8e-9a4ebb48c144 Auditing and Assurance Standards Council. Retrieved March 4, 2013. For http://www.aasc.org.ph/downloads/PSA/publications/PDFs/PSA-705Revised-and-Redrafted.pdf International Auditing and Assurance Standards Board(2002). ASPC Glossary of Terms