PSA 200 OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF AN AUDIT

EFFECTIVE: BEGINNING ON OR AFTER DECEMBER 15, 2009.

Should be read in conjunction with PSA 220 Quality Control for an Audit of FS (just like PSQM 1)

AUDIT OF FINANCIAL STATEMENTS

Purpose: To enhance the degree of confidence of intended users in the FS.

How? By expression of an opinion of an auditor.

Overall Objectives of the Auditor:

(a) To obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion on whether the financial statements are
prepared, in all material respects, in accordance with an applicable financial
reporting framework; and

(b) To report on the financial statements, and communicate as required by the PSAs, in
accordance with the auditor’s findings.

What? FS are prepared, in all material respects, in accordance with an applicable financial reporting
framework- Philippine Reporting Standards Framework (PFRS).

 The financial statements subject to audit are those of the entity, prepared and presented by
management of the entity with oversight from those charged with governance.

REQUIREMENT FOR AN AUDITOR:

Exercise professional judgment and maintain professional skepticism throughout the planning and
performance of the audit and, among other things:

 Identify and assess risks of material misstatement, whether due to fraud or error, based on an
understanding of the entity and its environment, including the entity’s internal control (TOC).
 Obtain sufficient appropriate audit evidence about whether material misstatements exist,
through designing and implementing appropriate responses to the assessed risks (PSA 330:
Responses)
 Form an opinion on the financial statements based on conclusions drawn from the audit
evidence obtained.
CONCEPT OF MATERIALITY - applied by the auditor both in planning and performing the audit, and in
evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any,
on the financial statements.

How? Using Auditor’s Professional Judgement

FAIR PRESENTATION FRAMEWORK

(i) Acknowledges explicitly or implicitly that, to achieve fair presentation of the financial
statements, it may be necessary for management to provide disclosures beyond those
specifically required by the framework; or
(ii) Acknowledges explicitly that it may be necessary for management to depart from a
requirement of the framework to achieve fair presentation of the financial statements. Such
departures are expected to be necessary only in extremely rare circumstances.

COMPLIANCE FRAMEWORK

Same but does not contain the acknowledgements in (i) or (ii) above.

Premise, relating to the responsibilities of management and, where appropriate, those charged with
governance, on which an audit is conducted – That management and, where appropriate, those charged
with governance have the following responsibilities that are fundamental to the conduct of an audit in
accordance with PSAs. That is, responsibility:

(i) For the preparation and presentation of the financial statements in accordance with the
applicable financial reporting framework; this includes the design, implementation and
maintenance of internal control relevant to the preparation and presentation of financial
statements that are free from material misstatement, whether due to fraud or error; and
(ii) To provide the auditor with:
a. All information, such as records and documentation, and other matters that are relevant
to the preparation and presentation of the financial statements;
b. Any additional information that the auditor may request from management and, where
appropriate, those charged with governance; and
c. Unrestricted access to those within the entity from whom the auditor determines it
necessary to obtain audit evidence.

REQUIREMENTS:

1. Ethical Requirements Relating to an Audit of Financial Statements

a. Part A of the Code of Ethics
 Integrity
 Objectivity
 Professional Competence and due care
 Confidentiality
  Professional Behavior
b. Part B of the Code of Ethics illustrates how the conceptual framework is to be applied in
specific situations.
c. Including those pertaining to independence- in mind and in appearance.

2. Professional Skepticism
3. Professional Judgment
4. Sufficient Appropriate Audit Evidence and Audit Risk

Philippine Standard on Quality Control (PSQC) 1 (Redrafted) sets out the responsibilities of the
firm for establishing policies and procedures designed to provide it with reasonable assurance
that the firm and its personnel comply with relevant ethical requirements, including those
pertaining to independence.

PSA 220 (Redrafted) sets out the engagement partner’s responsibilities with respect to
relevant ethical requirements. Engagement team is entitled to rely on a firm’s systems in
meeting its responsibilities with respect to quality control procedures.

AUDIT RISK (AR)

AR= (IR x CR) x DR

Risk of Material Misstatement (@ Assertion Level) = IR x CR

 Inherent Risk- is higher for some assertions and related classes of transactions, account
balances, and disclosures than for others. E.g for complex transactions or for accounts consisting
of amounts derived from accounting estimates that are subject to significant estimation
uncertainty.
 Control Risk- is a function of the effectiveness of the design, implementation and maintenance
of internal control by management to address identified risks that threaten the achievement of
the entity’s objectives relevant to preparation of the entity’s financial statements.
 No matter how well designed and operated, can only reduce, but not eliminate,
risks of material misstatement in the financial statements, because of the inherent
limitations of internal control.

Detection Risk- a function of the effectiveness of an audit procedure and of its application by the
auditor. Matters such as:

 Adequate planning
 proper assignment of personnel to the engagement team;
 the application of professional skepticism; and
 supervision and review of the audit work performed

assist to enhance the effectiveness of an audit procedure and of its application and reduce the
possibility that an auditor might select an inappropriate audit procedure, misapply an appropriate audit
procedure, or misinterpret the audit results.
PSA 210 AGREEING THE TERMS OF ADIT ENGAGEMENTS
Requirements:

1. Preconditions for an Audit

a. Acceptable financial reporting framework
b. Management’s acknowledgement and understanding of its responsibilities:
i. Preparation of fairly presented FS
ii. Internal control
iii. Provide the auditor with:
1. Access to all relevant information- records, documentation, and other
matters.
2. Additional info requested by auditor
3. Unrestricted access to persons within the entity

If not present: the auditor shall discuss the matter with management. Unless required
by law or regulation to do so, the auditor shall not accept the proposed audit
engagement.

Limitation on scope prior to engagement acceptance: the auditor believes the

limitation will result in the auditor disclaiming an opinion on the financial statements,
the auditor shall not accept such a limited engagement as an audit engagement, unless
required by law or regulation to do so.

2. Agreement on Audit Engagement Terms

- Shall be recorded on AUDIT ENGAGEMENT LETTER or other suitable form of
written agreement. AUL contains:
o The objective and scope of the audit of the financial statements;
o The responsibilities of the auditor;
o The responsibilities of management;
o Identification of the applicable financial reporting framework for the
preparation of the financial statements; and
o Reference to the expected form and content of any reports to be issued by
the auditor and a statement that there may be circumstances in which a
report may differ from its expected form and content.

In addition to including the matters required by paragraph 10, an audit

engagement letter may make reference to, for example:

o Elaboration of the scope of the audit, including reference to applicable

legislation, regulations, PSAs, and ethical and other pronouncements of
professional bodies to which the auditor adheres.
o The form of any other communication of results of the audit
engagement.
 o The fact that because of the inherent limitations of an audit, together
with the inherent limitations of internal control, there is an unavoidable
risk that some material misstatements may not be detected, even
though the audit is properly planned and performed in accordance with
PSAs.
o Arrangements regarding the planning and performance of the audit,
including the composition of the audit team.
o The expectation that management will provide written representations
(see also paragraph A13).
o The agreement of management to make available to the auditor draft
financial statements and any accompanying other information in time to
allow the auditor to complete the audit in accordance with the
proposed timetable.
o The agreement of management to inform the auditor of facts that may
affect the financial statements, of which management may become
aware during the period from the date of the auditor’s report to the
date the financial statements are issued.
o The basis on which fees are computed and any billing arrangements.
o A request for management to acknowledge receipt of the audit
engagement letter and to agree to the terms of the engagement
outlined therein.

When relevant, the following points could also be made in the audit
engagement letter:

o Arrangements concerning the involvement of other auditors and

experts in some aspects of the audit.
o Arrangements concerning the involvement of internal auditors and
other staff of the entity.
o Arrangements to be made with the predecessor auditor, if any, in
the case of an initial audit.
o Any restriction of the auditor’s liability when such possibility exists.
o A reference to any further agreements between the auditor and the
entity.
o Any obligations to provide audit working papers to other parties.
3. Recurring Audits
- The auditor shall assess if circumstances require:
o The terms to be revised
o There is a need to remind the entity of the existing terms
 Any indication that the entity misunderstands the objective and
scope of the audit.
 Any revised or special terms of the audit engagement.
 A recent change of senior management.
 A significant change in ownership.
 A significant change in nature or size of the entity’s business.
  A change in legal or regulatory requirements.
 A change in the financial reporting framework adopted in the
preparation of the financial statements.
 A change in other reporting requirements.

4. Acceptance of a Change in the Terms of the Audit Engagement

May result from:
 a change in circumstances affecting the need for the service (Reasonable)
 a misunderstanding as to the nature of an audit as originally requested (Reasonable)
 a restriction on the scope of the audit engagement, whether imposed by management
or caused by other circumstances. (NOT Reasonable)
 No reasonable justification: NOT AGREE
o Not permitted by management to continue the original engagement:
 WITHDRAW
 Determine whether there is any obligation, either contractual or
otherwise, to report the circumstances to other parties, such as
those charged with governance, owners or regulators.
 Reasonable justification: AGREE both auditor and management
o Record new terms in Audit Engagement Letter

In order to avoid confusing the reader, the report on the related service
would not include reference to:

 The original audit engagement; or

 Any procedures that may have been performed in the original
audit engagement, except where the audit 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.
PSA 300 PLANNING AN AUDIT OF FS
 continual and iterative process

OVERALL AUDIT STRATEGY => AUDIT PLAN

Updating and changing during the course of the audit.

Needs documentation of both and any significant changes made and the reasons for such changes.

Overall Audit Strategy Audit Plan- more detailed

Characteristics of the engagement (scope) RAP
Reporting objectives of the engagement- to plan FAP
the timing of the audit and the nature of the
communications required;
Significant factors in directing the engagement Other planned audit procedures
team’s efforts (using professional judgement)
Results of preliminary engagement activities and,
where applicable, knowledge gained on other
engagements performed by the engagement
partner for the entity is relevant; and
Ascertain the nature, timing and extent of
resources necessary to perform the engagement.

The Role and Timing of Planning

Adequate planning benefits the audit of financial statements in several ways, including the following:

 Helping the auditor to devote appropriate attention to important areas of the audit.
 Helping the auditor identify and resolve potential problems on a timely basis.
 Helping the auditor properly organize and manage the audit engagement so that it is performed
in an effective and efficient manner.
 Assisting in the selection of engagement team members with appropriate levels of capabilities
and competence to respond to anticipated risks, and the proper assignment of work to them.
 Facilitating the direction and supervision of engagement team members and the review of their
work.
 Assisting, where applicable, in coordination of work done by auditors of components and
experts.
What to plan? Such matters as:

 The analytical procedures to be applied as risk assessment procedures.

 Obtaining a general understanding of the legal and regulatory framework applicable to the
entity and how the entity is complying with that framework.
 The determination of materiality.
 The involvement of experts.
 The performance of other risk assessment procedures.

The process of establishing the overall audit strategy assists the auditor to determine, subject to the
completion of the auditor’s risk assessment procedures, such matters as:

 The resources to deploy for specific audit areas

 The amount of resources to allocate to specific audit areas
 When these resources are to be deployed
 How such resources are managed, directed and supervised