Huertazuela, Ara B. Manalo, Francies Nicole Maraño, Donita Mae P. C068 Auditing & Assurance Principles
Huertazuela, Ara B. Manalo, Francies Nicole Maraño, Donita Mae P. C068 Auditing & Assurance Principles
Huertazuela, Ara B. Manalo, Francies Nicole Maraño, Donita Mae P. C068 Auditing & Assurance Principles
After performing major audit procedures primarily to gather evidence regarding the fairness of
preparation and presentation of the financial statements being audited, the auditor performs
wrap-up procedures, reviews conclusions reached, and formulates the overall audit conclusion
to complete the audit.
Audit procedures generally performed by the auditor to complete the audit include the
following:
A. Identifying liability items not given appropriate accounting treatment
Search for unrecorded liabilities
Perform other procedures, including inquiry of entity’s legal counsel, to
identify loss contingencies.
During the concluding phase of the audit, the auditor is required to design and perform
analytical procedures that assist the auditor when forming an overall conclusion as to whether
the financial statements are consistent with the auditor’s understanding of the entity.
Related Parties
Parties are considered to be related if one party has the ability to control the other party
or exercise significant influence over the other party in making financial and operating
decisions.
Related-party transactions
Transactions with related parties involve transfer of resources or obligations between
related parties, regardless of whether a price is charged.
Responsibilities of Parties
Management
● Identification and disclosure of related parties and transactions with such parties.
● Design and implement adequate accounting and internal control systems to
ensure
that transactions with related parties are appropriately identified in the
accounting records and disclosed in the financial statements.
Auditor
● Perform audit procedures designed to obtain sufficient appropriate audit
evidence regarding the identification and disclosure by management of:
a. related parties (identity and nature of relationships)
b. effects of related party transactions that are material to the financial
statements.
● Obtain an understanding of the controls that management has established to
identify, properly account for, disclose relationships and transactions with related
parties
● Consider the adequacy of control procedures over the authorization and
recording of related party transactions.
While the existence of related parties and transactions between such parties are considered
ordinary features of business, the auditor needs to be aware of them because:
a. Related party relationships and transactions are required to be disclosed by GAAP;
b. The existence of related parties or related party transactions may affect the financial
statements;
c. The source of audit evidence affects the auditor’s assessment of its reliability; and
d. A related party transaction may be motivated by other than ordinary business
considerations.
During the course of the audit, the auditor needs to be alert for transactions which appear
unusual in the circumstances and may indicate the existence of previously unidentified related
parties.
Example include:
● Transactions which have abnormal terms of trade, such as unusual prices, interest
rates, guarantees, and repayment terms.
● Transactions which lack an apparent logical business reason for their occurrence.
● Transactions in which substance differs from form.
● Transactions processed in an unusual manner.
● High volume or significant transactions with certain customers or suppliers as
compared with others.
● Unrecorded transactions such as the receipt or provision of management services at
no charge.
Audit procedures
During the course of the audit, the auditor carries out procedures which may identify the
occurrence of transactions with related parties. Examples include:
● Performing detailed tests of transactions and balances.
● Reviewing minutes of meetings of shareholders and directors.
● Reviewing accounting records for large or unusual transactions or balances, paying
particular attention to transactions recognized at or near the end of the reporting
period.
● Reviewing confirmations of loans receivable and payable and confirmations from
banks. Such a review may indicate guarantor relationship and other related party
transactions.
● Reviewing investment transactions, for example, purchase or sale of an equity
interest in a joint venture or other entity.
Management representations
The auditor should obtain a written representation letter from management concerning the:
a. Completeness of information provided regarding the identification of related parties; and
b. Adequacy of related party disclosure in the financial statements.
Subsequent Events
These are events occurring between the date of the financial statements and the date of
the auditor’s report, and facts that become known to the auditor after the date of the auditor’s
report.
Type I Events
These are events that provide evidence of conditions that existed at the date of the financial
statements (known as adjusting events). Examples include:
✔ events that indicate that the going concern assumption in relation to the whole or part
of the entity is not appropriate
✔ settlements after reporting date of court cases that confirm the entity had a present
obligation at reporting date
✔ receipt of information after reporting date indicating that an asset was impaired at a
reporting date
✔ bankruptcy of a customer that occurs after reporting date that confirms a loss existed
at reporting date on trade receivables
✔ sales of inventory after reporting date that give evidence about their net realizable
value at reporting date
✔ discovery of fraud or errors that show the financial statements are incorrect
Type II Events
These are events that are indicative of conditions that arose after the date of the financial
statements (known as non-adjusting events). Examples of these events that would generally
result in disclosure include:
✔ major business combinations or disposal of a major subsidiary
✔ major purchase or disposal of assets, classification of assets as held for sale or
expropriation of major assets by government
✔ destruction of a major production plant by fire after reporting date
✔ announcing a plan to discontinue operations
✔ announcing a major restructuring after reporting date
✔ major ordinary share transactions
✔ abnormally large changes, after the reporting date, in asset prices or foreign exchange
rates
✔ changes in tax rates or tax law
✔ entering into major commitments such as guarantees
✔ commencing major litigation arising solely out of events that occurred after the
reporting date
Responsibilities of Parties
Management
● Any subsequent event shall be properly accounted for and adequately disclosed in
the financial statements
● Disclose to auditor all subsequent events affecting financial statements under audit
Auditor
● Obtain sufficient appropriate audit evidence that all events up to the date of the
auditor’s report that may require adjustment of, or disclosure in, the financial
statements have been identified.
● When the auditor becomes aware of events which materially affect the financial
statements, the auditor should consider whether such events are properly accounted
for and adequately disclosed in the financial statements.
● The auditor shall request management and, where appropriate, those charged with
governance, to provide a written representation that all events occurring subsequent
to the date of the financial statements and for which the applicable financial
reporting framework requires adjustment or disclosure have been adjusted or
disclosed.
Audit procedures
The auditor shall perform the procedures so that they cover the period from the date of the
financial statements to the date of the auditor’s report, or as near as practicable thereto.
c. Reading minutes, if any, of the meetings, of the entity’s owners, management and those
charged with governance, that have been held after the date of the financial statements
and inquiring about matters discussed at any such meetings for which minutes are not
yet available.
e. Read the entity’s latest available budgets, cash flow forecasts and other related
management reports for periods after the date of the financial statements.
f. Inquire, or extend previous oral or written inquiries, of the entity’s legal counsel
concerning litigation and claims.
Going concern assumption views an entity as continuing in business for the foreseeable
future with neither the intention nor the necessity of liquidation ceasing trading or seeking
protection from creditors pursuant to laws or regulations.
General purpose financial statements are prepared on a going concern basis. On the
other hand, special purpose financial statements may or may not be prepared in accordance
with a financial reporting framework for which the going concern basis is relevant.
Example: The going concern basis is not relevant for some financial statements prepared
on a tax basis in particular jurisdictions.
When the use of the going concern assumption is appropriate, assets and liabilities are
recorded on the basis that the entity will be able to realize its assets and discharge its liabilities
in the normal course of business.
Responsibilities of Parties
✔ Make specific assessment of the entity's
ability to continue as a going concern for
at least twelve (12) months from the
✔ Consider appropriateness of
management's use of going concern.
✔ Inquire to management and consider
Examples of events that may cast significant doubt about the going concern assumption:
a. Financial
● Net liability or net current liability position.
● Fixed-term borrowings approaching maturity without realistic prospects of renewal or
repayment; or excessive reliance of short-term borrowings to finance long-term assets.
● Indications of withdrawal of financial support by debtors and other creditors.
● Negative operating cash flows indicated by historical or prospective financial
statements.
C. Other
● Non-compliance with capital or other statutory requirements
● Pending legal or regulatory proceedings against the entity that may, if successful, result
in claims that are unlikely to be satisfied.
● Changes in legislation or government policy expected to adversely affect the entity.
● Uninsured or underinsured catastrophes when they occur.
Definition
Written representation
- Refers to a written statement by management provided to the auditor to confirm
certain matters or to support other audit evidence. Written representations in this
context do not include financial statements, the assertions therein, or supporting
books and records.
● Other terms used to describe written representations include written representation letter,
management representation letter, client representation letter, and representation letter.
1. It has fulfilled its responsibility for the preparation and presentation of the financial
statements as set out in the terms of the audit engagement and, in particular, whether
the financial statements are prepared and presented in accordance with the applicable
financial reporting framework.
2. It has provided the auditor with all relevant information agreed in the terms of the audit
engagement, and that all transactions have been recorded and are reflected in the
financial statements.
Audit evidence obtained during the audit that management is fulfilling the
responsibilities that it agreed to in the terms of the audit engagement is not sufficient
without obtaining confirmation from management that it believes that it has fulfilled
those responsibilities.
Simply stated, such letter is used as evidence that management acknowledges its responsibility
for the fair presentation of the financial statements in accordance with applicable financial
reporting framework, has approved the financial statements, and has provided all the
information relevant to the audit engagement.
Furthermore, in addition to written representations, the auditor can obtain such
acknowledgment of management's responsibility thru the following:
✔ from relevant minutes of meetings of the board of directors or similar body; or
✔ By obtaining signed copy of the financial statements.
The date of the written representations shall be as near as practicable to, but not after, the
date of the auditor's report on the financial statement. Simply stated, the letter may be dated
on or before the date of the auditor's report. In practice, the date of the letter coincides with
the date of the auditor's report.
Moreover, the written representations shall be for all financial statement and period or
periods referred to in the auditor's report
2. Addressee
The written representations shall be in the form of a representation letter addressed to the
auditor.
The auditor requests written representation from the management who are responsible for
the preparation and presentation of the financial statements
The specific individuals who will prepare and sign the letter may vary depending on the
governance structure of the entity, and relevant law regulation
Ordinarily, the letter will be signed by the entity's chief executive officer in chief financial
officer, or other equivalent persons in entities that do not en such titles (e.g., President for CEO
and Treasurer for CFO). In some came other parties, such as those charged with governance
may also responsible for the preparation and presentation of the financial statements
In the event where the signatories of the letter were not present during periods referred to
in the auditor's report, they may assert that they are not in a position to provide some or all of
the written representations because they were not in place during the period. However this
condition does reduce their responsibilities for the financial statements as a whole. Accordingly,
the requirement for the auditor to request from them written representations that cover the
whole of the relevant period(s) still applies.
The auditor shall form an opinion on whether the financial statements are prepared, in
all material respects, in accordance with the applicable financial reporting framework.
In order to form that opinion, the auditor shall conclude as to whether the auditor has
obtained reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error. That conclusion shall take into
account:
(c) whether the financial statements are prepared, in all material aspect, in accordance
with the requirements of the applicable financial framework
Formation of Opinion
After evaluating the evidence obtained, the auditor should decide whether to accept the
financial statements as fairly stated or to request management to revise the statements.
Material misstatements discovered during the audit must be corrected by recommending
appropriate adjusting entries.
If management accepts all the adjusting entries proposed by the auditor, an unmodified
report is issued on the financial statements. On the other hand, if management refuses to
correct the financial statements for these material misstatements the auditor should issue a
qualified or an adverse opinion.
Ordinarily, the auditor does not have any responsibility to perform additional
procedures after the financial statements are issued. However, when the auditor becomes
aware that the report issued in connection with the financial statements may be inappropriate,
the auditor must take steps to prevent future reliance on such report.
1. Subsequent events
The auditor has no obligation to perform any audit procedures regarding the financial
statements after the date of the auditor’s report. During this period, it is the responsibility of
the management to inform the auditor of events that may affect the financial statements.
When, after the date of the auditor’s report but before the financial statements are
issued, the auditor becomes aware of a fact which may materially affect the financial
statements, the auditor should:
After the date of auditor’s report but After the date of auditor’s report and
before issuance issuance
Discuss matter with the management, and where appropriate, those charged with
governance.
Consider whether the financial statements need amendment.
Inquire how management intends to address the matter in the financial statements
When management amends the financial statements
Carry out the necessary audit procedures Carry out the necessary audit procedures
in the circumstances in the circumstances
Provide the management with a new Review the steps taken by management
report on the amended financial that anyone in receipt of the previously
statements issued reports is informed of the
situation.
If the management makes the appropriate revisions and disclosures to the users of the
financial statements, the auditor should issue a new auditor's report that includes an emphasis
of a matter paragraph to highlight the reason for the revision of the previously issued financial
statements. The new auditor’s report shall not be dated earlier than the date of approval of the
amended financial statements. The new date is normally the date when the specific subsequent
event occurred.
An additional date may be included in the auditor’s report to inform users that the
auditor’s procedures subsequent to that date were restricted to the subsequent amendment of
the financial statements. This concept is known as dual dating.
In the event that management refuses to revise the financial statement or to inform the
users about the newly discovered information, the auditor should notify those persons
ultimately responsible for the direction of the entity about the management’s refusal and about
his intent to prevent users from relying on the auditor’s report.
Auditors are not required to review the working papers once the audit report is issued.
However, CPA firm's internal inspection program shall disclose the omission of auditing
procedures considered necessary at the time of the audit. In this situation, the auditor should
follow these guidelines:
The results of other audit procedures, performed during the audit, may compensate for
or make the omitted procedure less important. In determining whether-there were other
procedures applied that could compensate for the omitted procedure, the auditor may:
If the auditor determines that the omission of the procedures is important because it
impairs the auditor's ability to support the previously issued opinion, and the auditor believes
that there are persons currently relying, or likely to rely on the report; the auditor should
promptly apply the omitted procedures or the corresponding alternative procedures.
The result of applying the omitted procedure may indicate, whether or not, material
misstatements exist. If, after applying the omitted procedures, the auditor determines that the
financial statements are materially misstated and that the auditor's opinion was inappropriate,
the auditor should discuss the matter with the management and, if necessary, should take steps
to prevent future reliance on the report.