AUD PROB REVIEWER

FINANCIAL STATEMENT PREPARATION

1. Income Statement or Statement of Financial Performance

2. Statement of Changes in Equity
3. Balance Sheet or Statement of Financial Position
4. Statement of Cash Flows
5. Notes to the Financial Statements

Closing entries, also called closing journal entries, are

entries made at the end of an accounting period to zero out
all temporary accounts and transfer their balances to
permanent accounts. In other words, the temporary
accounts are closed or reset at the end of the year.

A Post-Closing Trial Balance is prepared after the recording

and posting of the closing entries. The remaining
Permanent/Real accounts of assets, liabilities and equity
are presented with their balances. This provides the
starting balances for the next accounting period. ACCRUALS AND DEFERRALS

CORRECTING AND ADJUSTING ENTRY

Adjusting entries can be divided into five categories:
(1) Deferred (Prepaid) Expenses
Deferred (Prepaid) Expenses - includes miscellaneous assets
that are paid for in advance and then expire or get used up in
the near future. Debit an expense account and credit the
prepaid asset account. (Examples include Rent, Insurance, and
Supplies)
Adjusting Journal entry:
Asset Expense $xxx
Prepaid Asset $xxx
- the value of the asset that was used up

(2) Depreciation of assets

Depreciation of Plant Assets - the allocation of a plant asset's
cost to an expense account as it is
used over its useful life. Debit an expense account and credit a to provide a product or service to the customer. Debit a liability
contra-asset account. account and credit a revenue account.
Adjusting Journal Entry:
Adjusting Journal entry:
Unearned Revenue $xxx
Depreciation Expense, $xxx
Revenue $xxx
Accumulated Depreciation, $xxx
- For the value of products/services provided
(3) Accrued Expenses
Accrued Expenses - Expenses that a business incurs before
AUDIT PROCESS
they pay them Debit an expense account and credit a liability
account (Examples include Wages and Interest)
What is an audit?
Adjusting Journal Entry:
- systematic process of
Expense $xxx
Payable $xxx objectively obtaining and
- For the amount owed
evaluating evidence
(4) Accrued Revenues regarding assertions about
Accrued Revenues - revenues that a business has earned but
has not yet received payment for. Debit an asset account and
economic actions and
credit a revenue account. (Examples include Interest)
Adjusting Journal Entry:
events to ascertain the
Receivable $xxx degree of correspondence
Revenue $xxx
(5) Deferred (Unearned) Revenues
between these
Deferred (Unearned) Revenues - cash collected from customers
before work is done by the business. The business has a liability
assertions and established communicating the results
criteria and thereof
communicating the results Audit Process
thereo - The sequence of different
What is an audit? activities (or ‘steps’,
- systematic process of ‘phases’) involved in an
objectively obtaining and audit.
evaluating evidence Pre-engagement
regarding assertions about This phase will require a
economic actions and decision from the auditor to
events to ascertain the accept a new client or
degree of correspondence continue the relationship
between these with an
assertions and established
criteria and
existing one. This process In making a decision
would require an evaluation whether to accept or reject
of an
the auditor’s qualification engagement, an
and the integrity and What is an audit?
auditability of the client’s - systematic process of
financial statements. objectively obtaining and
Primary objective: To evaluating evidence
minimize the likelihood of regarding assertions about
being economic actions and
associated with a client events to ascertain the
whose management lacks degree of correspondence
integrity between these
Acceptance of an assertions and established
Engagement criteria and
communicating the results existing one. This process
thereof would require an evaluation
Audit Process of
- The sequence of different the auditor’s qualification
activities (or ‘steps’, and the integrity and
‘phases’) involved in an auditability of the client’s
audit. financial statements.
Pre-engagement Primary objective: To
This phase will require a minimize the likelihood of
decision from the auditor to being
accept a new client or associated with a client
continue the relationship whose management lacks
with an integrity
Acceptance of an
Engagement
In making a decision communicating the results
whether to accept or reject thereof
an Audit Process
engagement, an - The sequence of different
What is an audit? activities (or ‘steps’,
- systematic process of ‘phases’) involved in an
objectively obtaining and audit.
evaluating evidence Pre-engagement
regarding assertions about This phase will require a
economic actions and decision from the auditor to
events to ascertain the accept a new client or
degree of correspondence continue the relationship
between these with an
assertions and established
criteria and
existing one. This process In making a decision
would require an evaluation whether to accept or reject
of an
the auditor’s qualification engagement, an
and the integrity and What is an audit?
auditability of the client’s - systematic process of
financial statements. objectively obtaining and
Primary objective: To evaluating evidence
minimize the likelihood of regarding assertions about
being economic actions and
associated with a client events to ascertain the
whose management lacks degree of correspondence
integrity between these
Acceptance of an assertions and established
Engagement criteria and
communicating the results existing one. This process
thereof would require an evaluation
Audit Process of
- The sequence of different the auditor’s qualification
activities (or ‘steps’, and the integrity and
‘phases’) involved in an auditability of the client’s
audit. financial statements.
Pre-engagement Primary objective: To
This phase will require a minimize the likelihood of
decision from the auditor to being
accept a new client or associated with a client
continue the relationship whose management lacks
with an integrity
Acceptance of an
Engagement
In making a decision Acceptance of an
whether to accept or reject Engagement
an In making a decision
engagement, an whether to accept or reject
an
What is an audit?
A systematic process of objectively obtaining and evaluating
evidence regarding assertions about economic actions and
events to ascertain the degree of correspondence between engagement, an auditor
these assertions and established criteria and communicating the
results thereof. should consider the
PROCESS: PACECIP
following:
1. PRE-ENGAGEMENT 1. Auditor’s competence
2. Auditor’s independence
2. AUDIT PLANNING
3. CONSIDERATION OF INTERNAL CONTROL
4. EVIDENCE-GATHERING 3. Auditor’s ability to serve
the client properly
5. COMPLETING THE AUDIT
6. ISSUANCE OF AUDIT REPORT
7. POST-AUDIT RESPONSIBILITY 4. Integrity of the
prospective client’s
management
❖ Obtain a preliminary ❖ Evaluate the firm’s
knowledge of the client’s ability to serve the
business and industry to prospective
determine whether the client.
auditor has the degree of ❖ Evaluate auditability.
competence required by ❖ Investigate the integrity
the engagement. of the client’s management
❖ Consider whether there through inquiry of
are any threats to the firm’s appropriate parties or
independence and communication with the
objectivity, and if so, predecessor auditor.
whether ❖ Agree on the terms of
adequate safeguards can be the engagement and prepare
established. an engagement letter
Pre-engagement
This phase will require a associated with a client
decision from the auditor to whose management lacks
accept a new client or integrity
continue the relationship
1. Pre-engagement:
This phase will require a decision from the auditor to accept a

with an new client or continue the relationship with an existing one. This
process would require an evaluation ofthe auditor’s qualification
and the integrity and auditability of the client’s financial
existing one. This process statements.

would require an evaluation

Primary objective: To minimize the likelihood of being
associated with a client whose management lacks integrity

of Acceptance of an Engagement
the auditor’s qualification In making a decision whether to accept or reject an
engagement, an auditor should consider the following:
and the integrity and 1. Auditor’s competence

auditability of the client’s 2. Auditor’s independence

3. Auditor’s ability to serve the client properly
financial statements. 4. Integrity of the prospective client’s management

Primary objective: To ALSO:

❖Obtain a preliminary knowledge of the client’s business and

minimize the likelihood of industry to determine whether the auditor has the degree of
competence required by the engagement.
being
 the management
❖Consider whether there are any threats to the firm’s
independence and objectivity, and if so, whether adequate
safeguards can be established

.❖Evaluate the firm’s ability to serve the prospective client. C. DISAGREEMENTS

❖Evaluate auditability. between the predecessor
❖Investigate the integrity of the client’s management through
inquiry of appropriate parties or communication with the auditor and management as
predecessor auditor.

❖Agree on the terms of the engagement and prepare an

to accounting
engagement letter Matters to be discussed with the predecessor auditor
include the following:

Matters to be discussed with A. The predecessor’s understanding as to the REASONS for

change in auditors

the predecessor auditor B. Information that might bear on the INTEGRITY of the
management
include the following: C. DISAGREEMENTS between the predecessor auditor and
management as to accounting.
A. The predecessor’s
understanding as to the The engagement letter documents and confirms:
- Auditor’s acceptance of the engagement
REASONS for change in -
-
Objective and scope of the audit
Extent of auditor’s responsibilities to the client

auditors - Form of any reports

B. Information that might CONTENT OF ENGAGEMENT LETTER:

A. The presence of audit risk
bear on the INTEGRITY of B. Unrestricted access to whatever records
C. The financial reporting framework used
 5.Description of any other
D. Objective of the audit
E. The form of any reports or other communication
F. Management’s responsibility
G. The scope of the audit
letters or repo
1. Basis in which fees are computed and any billing
arrangements

ALSO: 2. Expectation of receiving representation letter

3. Acknowledgment of management of the terms of agreement
Basis in which fees are 4. Arrangements regarding the planning of the audit

computed and any billing 5. Description of any other letters or report

arrangements FOLLOWING PTS COULD ALSO BE MADE:

2.Expectation of receiving Arrangements concerning

representation letter the involvement of other
3.Acknowledgment of auditors and experts in
management of the terms of some aspects of the audit
agreement - Arrangements concerning
4.Arrangements regarding the involvement of internal
the planning of the audit auditors and other staff
- Arrangements to be made Who appoints the
with the predecessor component auditor
auditor, if applicable ● Legal requirements in
- Any restriction of the relation to audit
auditor’s liability when appointments
such a ● Degree of ownership of
possibility exists the parent
- A reference to any further ● Whether a separate
agreements between the auditor’s report is to be
issued
- Arrangements concerning the involvement of other auditors
and experts in some aspects of the audit

for the component

- Arrangements concerning the involvement of internalauditors
and other staff
- Arrangements to be made with the predecessor auditor, if
applicable ● Degree of independence
- Any restriction of the auditor’s liability when such a possibility
exists of the component’s
- A reference to any further agreements between the auditor and
the client. management from the
AUDIT OF COMPONENTS
parent entity
- Who appoints the component auditor
 - Legal requirements in relation to audit appointments Since an entity’s internal control directly affects the reliability of
- Degree of ownership of the parent the financial statements, it is appropriate to study and evaluate
- Whether a separate auditor’s report is to be issued for these controls.
the component Primary objective: To establish a basis for reliance on internal
- Degree of independence of the component’s controls, in determining the nature, timing, and extent of audit
management from the parent entity procedures to be performed
4. Evidence-gathering
Evidence-gathering is also known as substantive testing.Using
RECURRING AUDITS information obtained in audit planning and consideration of
internal controls, the auditor performs substantive tests to
- Any indication that the client misunderstands the determine whether the entity’s financial statements are
objective and scope of the audit presented fairly in accordance with financial reporting standards.
- Any revised or special terms of the engagement Substantive procedures could either be analytical procedures or
- A recent change of management, the board of tests of details of transactions and balances. The auditor will
directors, or ownership always perform this phase.
- A significant change in ownership
- A significant change in nature or size of the client’s Primary objective: To ascertain the degree of correspondence
business between the financial statements prepared by the client’s
- A change in legal or regulatory requirements management and the financial reporting framework With this,
- A change in financial reporting framework adopted in the auditor will be able to conclude whether or not the financial
the preparation of the financial statements statements are presented fairly in accordance with financial
- A change in other reporting requirement reporting standards
Completing the Audit
Wrapping-up procedures are performed, conclusions
2. Audit Planning reached are reviewed, and an overall opinion is formed
Audit planning involves the development of an overall audit during this phase.
strategy, audit plan, and audit program. The auditor usually
obtains more detailed knowledge about the client’s business Primary objective: To assist the auditor the auditor in
and industry to understand the transactions and events affecting assessing if the conclusion reached is consistent with
the financial statements. evidence gathered
Preliminary assessment of risk and materiality is also made Issuance of the Audit Report
during this phase. In this stage, the auditor prepares and issues audit
Primary objective: To assess the different risks associated with report which describes the scope of the audit and states
the audit to determine the nature, timing, and extent of further the auditor’s conclusion regarding the fairness of the
audit procedures necessary to be performed financial statements.

3. Consideration of Internal Controls Primary objective: To communicate the conclusions

reached by the auditor to various intended users
Post-audit Responsibilities
After completion of the audit engagement, the auditor extent of audit procedures to be performed
performs procedures that will enable him/her to identify Evidence-gathering
areas for improvement in the current and future Evidence-gathering is also known as substantive testing.
engagements. Using information obtained in audit planning and
consideration of internal controls, the auditor performs
Primary objective: To assess and evaluate the quality of substantive tests to determine whether the entity’s
services delivered by the engagement team financial statements are presented fairly in accordance
Any indication that the client misunderstands the with financial reporting standards. Substantive
objective and scope of the audit procedures could either be analytical procedures or tests
➔ Any revised or special terms of the engagement of details of transactions and balances.
➔ A recent change of management, the board of The auditor will always perform this phase.
directors, or ownership Primary objective: To ascertain the degree of
➔ A significant change in ownership correspondence between the financial statements
prepared by the client’s management and the financial
➔ A significant change in nature or size of the client’s reporting framework
business
➔ A change in legal or regulatory requirements With this, the auditor will be able to conclude whether or
➔ A change in financial reporting framework adopted not the financial statements are presented fairly in
in the preparation of the financial statements accordance with financial reporting standards
➔ A change in other reporting requirement
Audit Planning
Audit planning involves the development of an overall
audit strategy, audit plan, and audit program. The auditor Completing the Audit
Wrapping-up procedures
usually obtains more detailed knowledge about the
client’s business and industry to understand the
transactions and events affecting the financial
statements.
Preliminary assessment of risk and materiality is also are performed, conclusions
reached are reviewed, and
made during this phase.
Primary objective: To assess the different risks
associated with the audit to determine the nature, timing,
and extent of further audit procedures necessary to be
performed an overall opinion is formed
during this phase.
Consideration of Internal Controls
Since an entity’s internal control directly affects the
reliability of the financial statements, it is appropriate to
study and evaluate these controls.
Primary objective: To establish a basis for reliance on
internal controls, in determining the nature, timing, and
Primary objective: To assist Primary objective: To
the auditor the auditor in communicate the
assessing if the conclusion conclusions
reached is consistent with reached by the auditor to
evidence gathered various intended users
Issuance of the Audit Post-audit Responsibilities
Report After completion of the
In this stage, the auditor audit engagement, the
prepares and issues audit auditor
report which describes the performs procedures that
scope of the audit and states will enable him/her to
the auditor’s conclusion identify
regarding the fairness of the areas for improvement in
financial statements. the current and future
engagements.
Primary objective: To
Primary objective: To assess and evaluate the quality of
services delivered by the engagement team

assess and evaluate the

quality of RISK ASSESSMENT PROCEDURE

services delivered by the The risk assessment procedures shall include the following :

(a)  Inquiries of management, and of others within the entity who

engagement team in the auditor's judgment may have information that is likely to
assist in identifying risks of material misstatement due to fraud
5. Completing the Audit or error. Much of the information obtained by the auditor's
Wrapping-up procedures are performed, conclusions reached inquiries is obtained from management and those responsible
are reviewed, and an overall opinion is formed during this for financial reporting. However, the auditor may also obtain
phase. information, or a different perspective in identifying risks of
material misstatement, through inquiries of others within the
Primary objective: To assist the auditor the auditor in entity and other employees with different levels of authority.
assessing if the conclusion reached is consistent with evidence
gathered (b)  Analytical procedures; the analytical procedures performed
as risk assessment procedures may identify aspects of the
entity of which the auditor was unaware and may assist in
6. Issuance of the Audit Report assessing the risk of material misstatement in order to provide a
basis for designing and implementing responses to the
In this stage, the auditor prepares and issues audit report which assessed risks. Analytical procedures performed as risk
describes the scope of the audit and states the auditor’s assessment procedures may include both financial and non-
conclusion regarding the fairness of the financial statements. financial information, for example, the relationship between
Primary objective: To communicate the conclusions reached sales and square footage of selling space or volume of goods
by the auditor to various intended users sold.

(c)  Observation and inspection; the observation and inspection

procedures may support inquiries of management and others,
and may also provide information about the entity and its
7. Post-audit Responsibilities environment. Examples of such audit procedures include
observation or inspection of the following : (i) the entity's
After completion of the audit engagement, the auditor performs
operations, (ii) documents (such as business plans and
procedures that will enable him/her to identify areas for
strategies), records, and internal control manuals, (iii) reports
improvement in the current and future engagements.
prepared by management (such as quarterly management
reports and interim financial statements) and those charged with a. When the auditor intends to rely on the operating
governance (such as minutes of board of directors' meetings), effectiveness of relevant controls in determining the nature,
(iv) the entity's premises and plant facilities. timing and extent of substantive procedures; or
Tests of controls are performed only on those
controls that the auditor has determined are
suitably designed to prevent, or detect and correct,
a material misstatement in an assertion.
b. When substantive procedures alone cannot provide sufficient
appropriate evidence at the assertion level
 Unlike substantive tests of details, tests of controls are not
required audit procedure.
 The greater the reliance the auditor plans to place on internal
control, the more extensive the tests of those controls that need
to be performed.
 Tests of controls generally consist of one (or combination of
Components of audit risk the following evidence gathering techniques:

The components of audit risk are: a. Inquiry

1. inherent risk- relating to the nature of the entity; b. Observation

2. control risk- concerning the entity's controls; and c. Inspection

3. detection risk - the risk that the auditor does not detect d. Reperformance of a control by the auditor
deviations.

Results of tests of controls:

TEST OF CONTROL a. Results do not confirm effectiveness of controls – the
Tests of controls are audit procedures designed to evaluate the auditor should revise the preliminary risk assessment of control
operating effectiveness of internal controls that are likely to risk from less than high to high level
detect or prevent material misstatements in support of a In addition, the auditor shall also make the necessary revision
reduced assessed level of control risk. In other words, tests of on the overall audit strategy, audit plan and preliminary audit
controls are performed to confirm that the controls tested are program.
working effectively in order to substantiate the reduced
assessed level of control risk. In this case, the auditor’s general approach to audit would be to
use the substantive approach (an approach whose emphasis is
 When to perform tests of controls: on substantive procedures).
b. Results confirm effectiveness of controls – the auditor  Billing
relies on the entity’s internal control and decrease substantive
testing  Recording

In this case, the auditor’s general approach to audit would be  Cash collection (and deposits)
the reliance or combined approach (an approach that uses both  Sales returns
tests of controls and substantive procedures).

Common Entries:
REVENUE AND RECEIPT CYCLE
 Sales
The Revenue Receipt Cycle
 Sales discounts
The revenue receipt cycle encompasses both the sale of goods
(revenue) and the collection of cash (receipt). The cycle is  Sales returns and allowances
related to each of the other three transaction cycles, since it:  Cash receipts
Receives resources and information provided by the financing  Allowance for uncollectible accounts
and conversion cycles.
 Write-off of specific uncollectible accounts
Provides resources and information to the expenditure/
disbursement cycle.
Scope of the Revenue/Receipt Cycle Common Forms:
Business Functions:  Customer order – a request from a customer to purchase
goods.
 Resources are sold to customers in exchange for promises
for future payments.  Sales order – identifies goods ordered by a customer,
including relevant information about price, quantity, payment
 Cash is collected from customers for resources sold to them. terms, etc.
 Shipping document – identifies goods shipped, and
represents a contract between the seller and carrier; a shipping
document is often in the form of a bill of lading.
Common Activities:
 Sales invoice – identifies goods sold and represents formal
 Customer orders (order entry) notice to a customer about the amount and terms of payment.
 Credit approval  Customer remittance advice – accompanies a sales invoice
 Inventory control but is intended to be returned with a customer’s payment
(remittance); a returned remittance advice indicates the purpose
 Shipping of cash payment, facilitating handling and recording.
Factors that influence revenue/receipt cycle activities and
controls:
 Nature of an entity’s industry
 The entity’s size and organizational structure
 The extent to which accounting information is processed by
computer